web.trysbcz.cz...1. table of contents 1. table of contents 000 2. sberbank cz, a.s., profile 001 3....

ANNUAL REPORTSBERBANK CZ, A.S.

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1. TABLE OF CONTENTS

1. TABLE OF CONTENTS 0002. SBERBANK CZ, A.S., PROFILE 001 3. INTRODUCTION BY THE MANAGEMENT BOARD 0024. KEY FIGURES IN SUMMARY 0035. MOST IMPORTANT EVENTS OF THE YEAR 0046. SBERBANK GROUP 0067. GOVERNING BODIES 0088. ORGANISATION CHART 0159. ECONOMIC CONDITIONS 01610. REPORT OF THE MANAGEMENT BOARD 01711. PRODUCTS AND SERVICES 02612. RISK MANAGEMENT 02813. CORPORATE GOVERNANCE 03214. REMUNERATION 04215. SOCIAL RESPONSIBILITY 04416. ADDITIONAL INFORMATION 04717. ALTERNATIVE PERFORMANCE INDICATORS 05018. FINANCIAL STATEMENTS 05219. QUANTITATIVE INDICES 13620. CAPITAL REQUIREMENTS 13721. REPORT ON RELATIONSHIP 13822. AFFIDAVIT 14823. INDEPENDENT AUDITOR’S REPORT 14924. OUR NETWORK 154

SBERBANK CZ | ANNUAL REPORT 2017TABLE OF CONTENTS

This annual report of Sberbank CZ, a.s. provides a true and accurate picture of the financial position, business activities and profit and loss of the Bank for the previous fiscal period and of the outlook of the future financial situation, business activities and profit and loss. The data and information in this report are always reported as of 31 December 2017, unless otherwise stated.

001SBERBANK CZ | ANNUAL REPORT 2017SBERBANK CZ, A.S., PROFILE

2. SBERBANK CZ, A.S., PROFILE

Corporate name Sberbank CZ, a.s.

Company identification number 25083325

Tax identification number CZ25083325

Registered office U Trezorky 921/2, Jinonice, 158 00 Prague 5, Czech Republic

Legal form Joint-stock company

Registration Incorporated in the Commercial Register maintained by the Municipal Court in Prague, Section B, Insert 4353

Date of incorporation 31 October 1996

Subject of enterprise Banking transactions and financial services of all kinds in accordance with Sections 1 (1) a), 1 (1) b) and 1 (3) a) – o) of Act No. 21/1992 Coll., on Banks, as amended, which are listed in the banking licence issued under the above Act.

Bank code 6800

BIC/SWIFT VBOECZ2XXXX

Data box identifier f94gyc6

LEI 31570010000000029583

Phone +420 800 133 444

Fax +420 221 969 951

E-mail [email protected]

Website www.sberbank.cz

Banking supervisory authority Czech National Bank

Law Czech Republic

002 SBERBANK CZ | ANNUAL REPORT 2017INTRODUCTION BY THE MANAGEMENT BOARD

3. INTRODUCTION BY THE MANAGEMENT BOARD

Ladies and gentlemen,dear clients, partners and shareholders,

The year 2017 was marked by record sales volumes and significant year-on-year profit growth.

The Bank successfully continued to develop its business activities in all target customer segments. We emphasised friendly and top-quality service to our clients, as well as an attractive product offer, supplemented with new products and services. We achieved record results in credit volume growth, quality enhancement and credit portfolio diversification, deposit stabilisation and strengthening relationships with clients, as well as improving the efficiency of internal processes and systems.

Despite strong competition on the banking market, low interest rates and pressure on interest income, the Bank achieved a significant profit growth of 56% on a year-on-year basis. The profit after tax for 2017 amounts to CZK 424 million. The year-on-year growth of economic results was mainly driven by record interest in mortgage loans and the consumer loan volumes also grew significantly. In addition, we achieved excellent results in insurance and investment revenues, where the range of investment products has been expanded. In the segment of corporate customers, the result was supported by the extraordinary volume of foreign exchange transactions before the termination of the Czech National Bank’s intervention scheme. We were also involved in major syndicated loans and were active in export, commercial and real estate financing. Net income from financial operations before the creation of reserves and loss provisions amounted to CZK 2.228 billion.

As of 31 December 2017, the balance sheet total of Sberbank CZ, a.s. had grown by 13% on a year-on-year basis and amounted to CZK 81.46 billion. The number of active clients of Sberbank CZ increased by 4% to 113,000 last year. The total volume of client deposits grew by 15% on a year-on-year basis to CZK 64.13 billion. The total volume of client loans increased by 8.8% to CZK 60.48 billion, mainly thanks to record sales of consumer and mortgage loans.

Despite the growth in business results and investments in new services and modern infrastructure, we managed to control administrative costs. Compared to the previous year, they increased slightly by 4%, to CZK 1.454 billion.

Thanks to prudent risk management, the bank maintained a low share of non-performing loans (NPL) last year, which decreased slightly to 5.43%.

The capital adequacy ratio reached the level of 16.44% at the end of the year. The capital, which is well above the threshold required by the regulator, allows further development of the Bank.1

In the past year, the bank maintained high liquidity stability and continues to meet the values prescribed by the LCR indicator.

We thank all our clients and trading partners for their trust and successful cooperation in the past year, and look forward to its continuation.

Jiří AntošMember of the Management Board

1 For details on the alternative performance indicators, see Chapter 17.

003SBERBANK CZ | ANNUAL REPORT 2017KEY FIGURES IN SUMMARY

2010 2011 2012 2013 2014 2015

11.3210.31

8.16 7.94

5.95 5.19

2016 2017

5.74 5.43

2010 2011 2012 2013 2014 2015

56.6 55.5 53.6 59.2

76.1

100.1

2016 2017

108.3 112.6

2010 2011 2012 2013 2014 2015

1.60 1.68 1.70 1.832.13

1.89

2016 2017

2.032.23

4. KEY FIGURES IN SUMMARY

NET INCOME FROM FINANCIAL OPERATIONSCZK billion

CZK million 2017 2016 2015 2014 2013 2012 2011 2010

Total assets 81,464 71,965 76,609 66,860 70,472 61,312 51,790 49,334

Capital adequacy 16.44% 16.55% 17.49% 16.18% 15.77% 11.78% 13.22% 14.20%

Liabilities to clients, including debt securities in issue 66,043 59,049 61,537 50,417 57,408 48,135 36,816 34,779

Receivables from clients 60,483 55,613 50,781 54,147 51,421 45,944 41,611 39,147

Net income from financial operations 2,228 2,028 1,888 2,133 1,830 1,699 1,678 1,595

Operating expenses 1,454 1,398 1,379 1,274 1,088 930 890 847

Profit on ordinary activities before tax 531 336 37 481 286 270 443 345

Profit for the year 424 272 23 383 230 209 346 271

Number of clients 112,559 108,310 100,116 76,137 59,246 53,608 55,529 56,572

Number of employees* 924 851 846 825 719 668 637 622

Number of points of sale 28 28 29 26 22 24 24 45

NPL (non-performing loans) 5.43% 5.74% 5.19% 5.95% 7.94% 8.16% 10.31% 11.32%

* registered number of employees, including employees on maternity leave

2010 2011 2012 2013 2014 2015

TOTAL ASSETS CZK billion

49.3 51.861.3

70.5 66.976.6

2016 2017

72.081.5

NUMBER OF CLIENTSThousands

NPL DEVELOPMENTPercent

004

5. MOST IMPORTANT EVENTS OF THE YEAR

In January...On 9 January 2017, the Management Board re-elected Vladimír Šolc as Chairman of the Management Board of Sberbank CZ, a.s.

At the end of the month, the annual New Year’s party was held for all the employees of the Bank, with the theme of the League of Extraordinary Gentlemen.

In February...On 23 February 2017, the sole shareholder of Sberbank CZ, a.s. appointed Mr Gerhard Hans Randa a member of the Bank’s Supervisory Board, and Mr Randa was subsequently elected as the Chairman of the Supervisory Board with effect from 3 March 2017.

We launched the Guaranteed Interest Rate Reduction by 1% campaign for FAIR Loans and Consolidations. We guaranteed that for all clients who received a better offer from our competitors during the repayment period of a FAIR Loan or FAIR Consolidation, the interest rate would be reduced to the offer’s level and then by another 1%.

In March…Mr Dusko Kantar resigned from his post as a member of the Bank’s Supervisory Board with effect as of 13 March 2017, which was acknowledged by the Bank’s Supervisory Board in its decision.

In April…The annual report and financial statements for 2016 were prepared and subsequently approved by the sole shareholder of Sberbank CZ, a.s., published on the bank’s website and sent to the Czech National Bank.

On 25 April 2017, a regular meeting of the Supervisory Board of Sberbank CZ, a.s. was held, at which, among other things, the Bank’s financial results for 2016 were discussed.

Volunteer employees participated in the national event called “Ukliďme Česko” (Let’s Clean the Czech Republic).

In May…Sberbank CZ, a.s., as a green bank, cares about the environment, so some employees of the Bank joined the project called “Do práce na kole” (To Work on a Bike) and travelled to work on a bike for a whole month.

The Anděl branch in Prague was partially modernised, which brought a lot of pleasant changes for clients.

In June…On 1 June 2017, we introduced contactless MasterCard Standard FAIR credit cards. Compared to the original Visa Classic cards, this new product has the contactless feature.

On 12 June 2017, Mr Béla Czigony became a new member of the Audit Committee.

On 14 June 2017, the term of office of a member of the Bank’s Supervisory Board, Mr Reinhard Kaufmann, was renewed for another four years.

On 23 June 2017, the office of a member of the Bank’s Management Board, Mr Miroslav Lukáč, who was in charge of corporate banking, was terminated. The section was taken over by the Chairman of the Management Board, Mr Vladimír Šolc.

On 27 June 2017, a general meeting of the Supervisory Board of Sberbank CZ, a.s. was held, at which the term of office of a member of the Bank’s Management Board, Mr Jindřich Horníček, was renewed.

In August…The Praha – Lazarská branch was modernised. After the reconstruction, one of the largest branches of Sberbank CZ now provides a new, comfortable and pleasant environment for both clients and employees.

SBERBANK CZ | ANNUAL REPORT 2017MOST IMPORTANT EVENTS OF THE YEAR

005

In September…On 1 September 2017, Mr Dušan Baran was appointed a member of the Bank’s Management Board responsible for finance. The Management Board thus became a full five-member team again.

On 26 September 2017, a regular meeting of the Supervisory Board of Sberbank CZ, a.s. was held, at which the Bank’s Supervisory Board acknowledged the Sberbank CZ Semi-Annual Report 2017.

In October…On 13 October 2017, Mr Stefan Karl Zapotocky became a new member of the Bank’s Supervisory Board.

Under the project of the Czech Banking Association called “Bankers to Schools”, some of our managers went to schools to see young people. This year, they focused on students in the eighth and ninth grades of primary schools across the Czech Republic.

In November…The entire Bank enthusiastically participated in the “Movember” event and managed to collect CZK 174,000. It won a nice third place within the Czech Republic.

In December…On 5 December 2017, a regular meeting of the Supervisory Board of Sberbank CZ, a.s. was held, at which, among other things, the IFRS 9 and GDPR projects were discussed.

SBERBANK CZ | ANNUAL REPORT 2017MOST IMPORTANT EVENTS OF THE YEAR

006

6. SBERBANK GROUP

6.1. About Sberbank Europe Sberbank Europe AG, headquartered in Vienna, Austria, is a banking group that is 100% owned by Sberbank of Russia, the largest bank in Russia. Sberbank of Russia is servicing more than 70% of the Russian population. The European subsidiary Sberbank Europe is present in eight European markets: Austria, Germany, Bosnia and Herzegovina (Sarajevo and Banja Luka), Croatia, Czech Republic, Hungary, Slovenia and Serbia. In Germany, Sberbank Direct serves retail clients, offering online basic banking products. In Austria, Sberbank Europe serves corporate clients with business focus on CEE markets, Russia and CIS. Sberbank Europe Group has around 665,000 customers, operates 190 branches, and employs 4,050 employees across Europe. The total assets of Sberbank Europe amount to EUR 12.6bn (as of June 2017).2

6.2. Information on RelationshipsSberbank Europe AG is an entity directly controlling Sberbank CZ, a.s., and is part of the Group. Sberbank of Russia is an entity directly controlling Sberbank Europe AG and indirectly controlling Sberbank CZ, a.s., and is part of the Group. The structure of the Group, including the organisational chart, is described in the Report on Relationships (see p. 138).

Management is conducted mainly through decisions of the sole shareholder exercising the powers of the General Meeting (e.g. through an amendment to the Articles of Association) and through members in the bodies of Sberbank CZ, a.s., i.e. the Supervisory Board and the Audit Committee (e.g. the Supervisory Board appoints and dismisses members of the Management Board of Sberbank CZ, a.s.).

SBERBANK CZ | ANNUAL REPORT 2017SBERBANK GROUP

2 https://www.sberbank.at/sberbank-europe-ag/about-us

Czech Republic

Hungary

Austria

Slovenia

Croatia

Bosnia and Herzegovina Serbia

Germany

007

Sberbank CZ, a.s., is not dependent on any other company in the Group.

Sberbank CZ, a.s., complies with and is governed by Act No. 90/2012 Coll. on business corporations (the “Business Corporations Act”). The Business Corporations Act stipulates that anyone who, using their influence in a business corporation, significantly and decisively affects the actions of that business corporation to its detriment, is obliged to provide compensation for the damage, unless they prove that they can reasonably have assumed that they acted in an informed manner and in the defensible interest of the entity affected. The measures to ensure that the controlling entity does not abuse the control arise from the Business Corporations Act. They include in particular the duty of the Management Board to prepare a report on relationships between the controlling entity and the controlled entity and between the controlled entity and entities controlled by the same controlling entity for the past fiscal period, and the duty of the controlling entity to compensate the controlled entity for any damage incurred. The Report on Relationships for 2017 is presented in the chapter entitled Report on Relationships (see p. 138).

6.3. Sberbank Europe’s business modelSberbank Europe’s business model is continuing to evolve around four pillars:

• Profitability: Following a successful development on CEE markets Sberbank Europe will focus on utilizing its capital and resources capabilities to further grow the business in subsidiaries

• Self-funded or self-sustainable: In addition to previous achievements in optimizing funding mix and decreasing dependency on Shareholder’s support, Sberbank Europe will emphasize on prudent capital management and risk weighted assets steering to achieve maximum return on capital

• Modern: Sberbank Europe will continue upgrading its digital capabilities and developing adequate mix of physical and online presence, which should ensure superior customer experience across all channels

• Light: Sberbank Europe will work further on continuous improvement of its operations, and on steering across the Group as efficiently as possible.

SBERBANK CZ | ANNUAL REPORT 2017SBERBANK GROUP

SBERBANK CZ | ANNUAL REPORT 2017GOVERNING BODIES008

Jindřich HORNÍČEKChief Risk Officer

Member of the Management Board since: 1 February 2016 Banking experience: 16 yearsManagement experience: 11 years

Jindřich Horníček was born in Brno on 18 August 1977 and studied economics at Masaryk University. In 2000–2001 he worked at Kasolvenzia Morava s.r.o., where he managed problematic receivables. Since 2002 he has worked for Sberbank CZ, a.s., (formerly Volksbank CZ, a.s.) in various positions. In 2001–2002 he was Relationship Manager for the business unit. In 2002–2007 he held the post of Risk Manager. In 2007–2009 he headed the SME Credit Risk Department. In 2009–2010 he headed the SME and Retail Credit Risk Department. In 2010–2012 he was Head of the Credit Risk Division, and from 2012 until February 2016 Head of the Underwriting Division. In February 2016 he became a member of the Management Board of Sberbank CZ, a.s., responsible for risk management.

He is a member of the Supervisory Board of the Sberbank CZ Endowment Fund; he is not a member of the bodies of any other companies.

Members of the Management Board

Jiří ANTOŠChief Retail Officer

Member of the Management Board since: 11 July 2013Banking experience: 19 yearsManagement experience: 19 years

Jiří Antoš was born in Roudnice nad Labem on 7 September 1972. He studied economics at the Banking Institute College in Prague. In 1993–1994 he worked for Mignon, a.s. as a broker. In 1994–1998 he worked as Region Retail Sales Manager at Agrobanka, a.s. In 1998–2004, he worked at GE Capital Bank, a.s. in various positions. In 1998–2000 he held the post of Quality Manager, in 2000–2001 Senior Quality Manager, and in 2001–2004 Head of the Retail Sales Support Department. In 2004–2006 he worked in Bratislava for Poštová Banka, a.s. as Retail Sales Director. In 2006–2011 he was a partner and CEO of the consulting firm CapacityPro, s.r.o. In 2011–2012 he worked in Vienna at Raiffeisen Bank International as Head of Sales, Service & Distribution. In 2013 he became Head of Sales and Distribution at Sberbank Europe AG in Vienna. Since 2013 he has been a member of the Management Board of Sberbank CZ, a.s., responsible for retail banking and marketing.

He is the Chairman of the Supervisory Board of the Sberbank CZ Endowment Fund; he is not a member of the bodies of any other companies.

7.1. Management BoardChairman of the Management Board

Vladimír ŠOLCChief Executive OfficerChief Corporate Officer

Member of the Management Board since: 1 August 2013Chairman of the Management Board since: 12 August 2013Banking experience: 19 yearsManagement experience: 16 years

Vladimír Šolc was born in Canada on 16 September 1971, and studied economics at the Rochester Institute of Technology. He has extensive experience in the field of economics, banking and management of corporate and financial institutions. In 1995–2000 he worked as Assistant Vice President of COMMERZBANK AG. In 2000–2006 he worked for CREDIT SUISSE (for the first two years as Vice-President in Prague and for the subsequent four years as Director in London). In 2006–2009 he held the post of Chief Executive Officer (CEO) at DEUTSCHE BANK AG in Prague. From 2011 until August 2013, he was a partner of DELOITTE ADVISORY. Since August 2013 he has held the office of Chief Executive Officer (CEO) and member of the Management Board of Sberbank CZ, a.s., and since June 2017 he has held the office of Chief Corporate Officer.

He is not a member of the bodies of any other companies.

7. GOVERNING BODIES

SBERBANK CZ | ANNUAL REPORT 2017GOVERNING BODIES 009

Dušan BARANChief Financial Officer

Chief Financial OfficerMember of the Management Board since: 1 September 2017Banking experience: 22 yearsManagement experience: 16 years

Dušan Baran was born on 6 April 1965 in Sušice. He graduated from the Faculty of Mathematics and Physics of Charles University and the School of Banking in Colorado and completed other educational programmes in the US. He held various posts at Česká spořitelna, a.s. from 1993 to 2013. He was a member of the Management Board from 1998 to 1999, the Chairman of the Management Board from 1999 to 2000, and the Deputy chairman of the Management Board of Česká spořitelna a.s. from 2000 to 2013. From 2014 to August 2017, he worked as an expert advisor for the management, owners of financial institutions and companies in the field of financial services. Since 1 September 2017, he has been a member of the Management Board of Sberbank CZ, a.s. responsible for finance.


Members of the Management Board whose membership ended in 2017

Miroslav LUKÁČ

Date of membership termination: 23 June 2017

The office of a member of the Management Board responsible for corporate banking was terminated as of 23 June 2017. Miroslav Lukáš held the post of a member of the Management Board of Sberbank CZ, a.s. from 1 November 2014.

In connection with the termination of the office of Miroslav Lukáš in the Bank’s Management Board, the Chairman of the Management Board, Vladimír Šolc, took over the section and thus became a member of the Bank’s Management Board responsible for corporate banking, effective from 24 June 2017.

Karel SOUKENÍKChief Operation Officer

Member of the Management Board since: 1 October 2013Banking experience: 13 yearsManagement experience: 13 years

Karel Soukeník was born in Plzeň on 11 August 1973. He graduated from the Faculty of Mathematics and Physics at Charles University in Prague, and completed his postgraduate studies in the field of economics at Charles University in Prague (CERGE-EI) and the State University of New York. In 2001– 2004 he worked as Management Consultant for McKinsey & Company. In 2005–2007 he worked at Citibank as Head of GCB Controlling, Head of Business MIS. In 2007–2008 he held the post of Integration Manager, and in 2008–2013 the post of Chief Financial Officer at Raiffeisenbank, a.s. Since 2013 he has been a member of the Management Board of Sberbank CZ, a.s., initially responsible for organisation, legal, IT & PMO, financial management, banking operations, economic management, ALM &Treasury. Since 1st September 2017 he has been responsible for organisation, legal, IT & PMO, banking operations and economic management.

He is a member of the Supervisory Board of the Sberbank CZ Endowment Fund; he is not a member of the bodies of any other companies.


Distressed Assets Committee

Committee members with voting rights are all members of the Management Board of Sberbank CZ, a.s., Head of OE 037 Workout & Restructuring, Head of OE 073 Credit Risk.

Vladimír ŠOLC Chief Executive OfficerChief Corporate Officer

Jiří ANTOŠ Chief Retail Officer

Jindřich HORNÍČEK Chief Risk Officer

Karel SOUKENÍK Chief Operation Officer

Dušan BARAN Chief Financial Officer

Jiřina MEVALDOVÁHead of OE 037 Workout & Restructuring

Martin VAKOČHead of OE 073 Credit Risk

Credit Committee

Committee members with voting rights are all members of the Management Board of Sberbank CZ, a.s., Head of OE 036 Underwriting Division.






Dmitry KHARINHead of OE 036 Underwriting Division

Asset and Liability Committee

Committee members with voting rights are all members of the Management Board of Sberbank CZ, a.s., Head of OE 026 ALM/Treasury, Head of OE 074 Market & Operational Risk.






Pavel SÜSSERHead of OE 026 ALM/Treasury

Zdeněk DANIELHead of OE 074 Market & Operational Risk

Committees Established by the Management Board


Project Portfolio Committee

Committee members with voting rights are all members of the Management Board of Sberbank CZ, a.s., Head of OE 015 IT & PMO.






Zdeněk MATYÁŠHead of OE 015 IT & PMO

Risk Committee

Committee members with voting rights are all members of the Management Board of Sberbank CZ, a.s., Head of OE 070 Integrated Risk Management, Head of OE 073 Credit Risk.






Tomáš HANZLÍKHead of OE 070 Integrated Risk Management

Martin VAKOČHead of OE 073 Credit Risk

Retail Committee

Committee members with voting rights are the member of the Management Board of Sberbank CZ, a.s., responsible for Retail, Head of OE 058 Segments & Marketing, Head of OE 155 Retail Products & CRM, Head of OE 090 Distribution, Head of OE 056 Digital Banking, Head of OE 120 Controlling (The Head of Controlling can be a voting member of the Committee only in cases specified in the Bylaws).


Ondřej HAVLÍKHead of OE 058 Segments & Marketing

Gabriela BRŮHOVÁHead of OE 155 Retail Products & CRM

Jan KOTARAHead of OE 090 Distribution

Libor VOLEKHead of OE 056 Digital banking

Pavel SÜSSERHead of OE 120 Controlling


Members of the Supervisory Board

Elena VIKLOVA

Member of the Supervisory Board since: 1 January 2016Banking experience: 11 yearsManagement experience: 9 years

Elena Viklova was born in Moscow on 1 March 1985. She studied economics at the State University of Moscow. In 2007–February 2017 she worked at Sberbank of Russia in various positions. In 2007–2008 she held the post of Relationship Manager. In 2008–2012 she headed the Foreign Network Development Department, in 2012–2014 she was deputy head of the International Business Development Department. In 2015 – February 2017 she hold the post of Senior Managing Director. Since February 2017 she has worked as Executive Advisory to CEO in Sberbank Europe AG.

Membership in the bodies of other companies:She is a member of the Supervisory Board of Sberbank banka d.d. in Slovenia, the Chairman of the Audit Committee of Sberbank Banka d.d. in Slovenia, a member of the Supervisory Board of Sberbank BH d.d. Sarajevo in Bosnia and Herzegovina, a member of the Supervisory Board of Sberbank Srbija a.d. Beograd in Serbia, the Deputy chairman of the Supervisory Board of Sberbank Magyarország Zrt. in Hungary and the Deputy chairman of the Audit Committee of Sberbank Magyarország Zrt. in Hungary.

Deputy chairman of the Supervisory Board

Arndt RÖCHLING

Member of the Supervisory Board since: 2 November 2016Deputy chairman of the Supervisory Board since: 16 November 2016Banking experience: 15 yearsManagement experience: 11 years

Arndt Röchling was born in the Federal Republic of Germany on 20 October 1967. He graduated from the University of Passau, majoring in Business Management with a focus on banking, finance, organisation and human resources. He wrote and defended his doctoral thesis at the University of Frankfurt an der Oder. In 2003–2007 he worked in various positions at Raiffeisen Zentralbank Austria AG. In 2007–2009 he headed the Financial Controlling Department at Raiffeisenbank Russia. In 2009–2015 he was a member of the Management Board of Raiffeisenbank Russia responsible for CFO. In 2015–2016 he was a member of the Management Board of Deutsche Bank in Russia, and since 2016 he has been a member of the Management Board of Sberbank Europe AG in Vienna responsible for CFO.

Membership in the bodies of other companies:He is a member of the Management Board of Sberbank Europe AG in Vienna, the Chairman of the Audit Committee at Sberbank Srbija a.d. Beograd in Serbia, the Chairman of the Supervisory Board at Sberbank Srbija a.d. Beograd in Serbia and the Chairman of the Supervisory Board at Sberbank a.d. Banja Luka in Bosnia and Herzegovina.

7.2. Supervisory BoardChairman of the Supervisory Board

Hans Gerhard RANDA

Member of the Supervisory Board since: 23 February 2017Chairman of the Supervisory Board since: 3 March 2017Banking experience: 55 yearsManagement experience: 31 years

From 1962 to 1986, Hans Gerhard Randa worked in various positions at Zentralsparkasse der Gemeinde Wien. He was a member of the Management Board of Creditanstalt-Bankverein AG from 1986 to 1990. In 1990, he became the Chairman of the Management Board of Österreichische Länderbank AG. He was the Deputy chairman of the Management Board of Z-Länderbank Bank Austria AG from 1991 to 1995. He was the Chairman of the Management Board of Bank Austria AG from 1995 to 2001. He was a member of the Management Board of Bayerische Hypo und Vereinsbank AG from 2001 to 2005. He was the Chairman of the Supervisory Board of Bank Austria Creditanstalt AG from 2003 to 2005. From 2005 to 2008, he was the Executive Vice President of Financial Planning at MAGNA International Inc., Toronto.

Membership in the bodies of other companies:He is the Chairman of the Management Board of Sberbank Europe AG in Vienna, the Chairman of the Supervisory Board of Sberbank Magyarország Zrt. in Hungary, and the Chairman of the Audit Committee of Sberbank Magyarország Zrt. in Hungary.


Stefan Karl ZAPOTOCKY

Member of the Supervisory Board since: 13 October 2017Banking experience: 41 yearsManagement experience: 32 years

Stefan Karl Zapotocky was born on 3 December 1952 in Austria. He graduated from the Technical University of Vienna. He worked for ERSTE Bank AG from 1976 to 1988. From 1988 to 1991, he was the Vice-President of the organisational unit dealing with new emissions and the international capital market. From 1991 to 2000, he held the post of the CEO and Head of Securities and Capital Markets at Bank Austria AG. From 2000 to 2006, he worked as CEO of Wiener Börse AG. He was a member of the Management Board of BAST Unternehmensbeteiligungs AG/LPC Capital Partners from 2000 to 2016. Since December 2017, he has been a member of the Management Board of Sberbank Europe AG.

Membership in the bodies of other companies:He is a member of the Management Board of Sberbank Europe AG in Vienna, the Chairman of the Supervisory Board of Sberbank banka d.d. in Slovenia, the Deputy chairman of the Audit Committee of Sberbank banka d.d. in Slovenia, and a member of the Supervisory Board of Breitenfeld AG in Austria.

Members of the Supervisory Board whose membership ended in 2017

Dusko KANTAR

Date of membership termination: 13 March 2017

Dusko Kantar was a member of the Bank’s Supervisory Board from 18 November 2015. The office of a member of the Supervisory Board of Sberbank CZ, a.s. was terminated with effect from 13 March 2017

The Supervisory Board of Sberbank CZ, a.s., has not established any committees.

Reinhard KAUFMANN

Member of the Supervisory Board since: 14 June 2013Banking experience: 15 yearsManagement experience: 13 years

Reinhard Kaufmann was born in Austria on 22 May 1971. He graduated from the Technical University of Vienna and the University of Vienna. In 1997–2000 he headed the Cost Controlling Department at Raiffeisenlandesbank Niederösterreich-Wien AG. In 2005–2012 he headed the Controlling Department at Volksbank International AG. In 2012–2015 he headed the Group Controlling Department at Sberbank Europe AG. In 2015 he became the Head of the Accounting/Reporting/Tax Department at Sberbank Europe AG.

Membership in the bodies of other companies:He is the Chairman of the Audit Committee at Sberbank BH d.d. Sarajevo in Bosnia and Herzegovina and Managing Director in ALB EDV GmbH.

As the term of office of Mr Reinhard Kaufmann expired as of 13 June 2017, the Bank’s shareholder decided to re-elect Mr Reinhard Kaufmann as a member of the Bank’s Supervisory Board for a new four-year term of office, effective from 14 June 2017.


Deputy chairman of the Audit Committee

Reinhard KAUFMANN

Member of the Audit Committee since: 18 April 2014Deputy chairman of the Audit Committee since: 1 August 2017Banking experience: 15 yearsManagement experience: 13 years

Reinhard Kaufmann was born in Austria on 22 May 1971. He graduated from the Technical University of Vienna and the University of Vienna. In 1997–2000 he headed the Cost Controlling Department at Raiffeisenlandesbank Niederösterreich-Wien AG. In 2005–2012 he headed the Controlling Department at Volksbank International AG. In 2012–2015 he headed the Group Controlling Department at Sberbank Europe AG. In 2015 he became the Head of the Accounting/Reporting/Tax Department at Sberbank Europe AG.

Membership in the bodies of other companies:He is the Chairman of the Audit Committee at Sberbank BH d.d. Sarajevo in Bosnia and Herzegovina and Managing Director in ALB EDV GmbH.

7.3. Audit CommitteeChairman of the Audit Committee

Arndt RÖCHLING

Member of the Audit Committee since: 1 July 2016Chairman of the Audit Committee since: 4 July 2016Banking experience: 15 yearsManagement experience: 11 years

Arndt Röchling was born in the Federal Republic of Germany on 20 October 1967. He graduated from the University of Passau, majoring in Business Management with a focus on banking, finance, organisation and human resources. He wrote and defended his doctoral thesis at the University of Frankfurt an der Oder. In 2003– 2007 he worked in various positions at Raiffeisen Zentralbank Austria AG. In 2007–2009 he headed the Financial Controlling Department at Raiffeisenbank Russia. In 2009–2015 he was a member of the Management Board of Raiffeisenbank Russia responsible for CFO. In 2015–2016 he was a member of the Management Board of Deutsche Bank in Russia, and since 2016 he has been a member of the Management Board of Sberbank Europe AG in Vienna responsible for CFO.

Membership in the bodies of other companies:He is a member of the Management Board of Sberbank Europe AG in Vienna, the Chairman of the Audit Committee at Sberbank Srbija a.d. Beograd in Serbia, the Chairman of the Supervisory Board at Sberbank Srbija a.d. Beograd in Serbia and the Chairman of the Supervisory Board at Sberbank a.d. Banja Luka in Bosnia and Herzegovina.

Member of the Audit Committee

Béla Czigony

Member of the Audit Committee since: 12 June 2017Banking experience: 12 yearsManagement experience: 7 years

Béla Czigony was born on 25 September 1977 in Budapest. He studied economics and European Studies at the University of Budapest. He worked as a Controller and EU Expert at the Ministry of the Interior in Hungary from 2002 to 2005. From 2005 to 2015, he worked in various positions at MKB Bank. He worked as a Reporting Specialist at the Accounting and Financial Reporting Unit from 2005 to 2010. From 2010 to 2012, he was Head of the IFRS Reporting Unit. From 2012 to 2015, he was Head of the IFRS and Supervisory Reporting Department. From 2015 to April 2017 he worked as Senior Manager at Audit Advisory at Deloitte. Since April 2017, he has been working as Head of Accounting at Sberbank Europe AG in Vienna.


7.4.Sole ShareholderSberbank Europe AG

Registration number: FN 161285i

Sberbank Europe AG is the sole shareholder of Sberbank CZ, a.s.It is based in Vienna at: Schwarzenbergplatz 3, 1010 Vienna, Republic of Austria

015SBERBANK CZ | ANNUAL REPORT 2017ORGANISATION CHART

8. ORGANISATION CHART

SUPERVISORY BOARD

130 Audit/Revision

175 Compliance & AML

153 Security & Investigation

MANAGEMENT BOARD

AUDIT COMMITTEE

DISTRESSED ASSETS COMMITTEE

RISK COMMITTEE

CREDIT COMMITTEE

ASSET & LIABILITY COMMITTEE

PROJECT PORTFOLIO COMMITTEE

RETAIL COMMITTEE

Real Estate &Project Finance

035 Credit Risk073 Legal170 Digital Banking056 ALM/Treasury026

Investment Banking &Global Markets

020 UnderwritingDivision

036 Facility Management

190 Retail Products & CRM

155 AccountingDivision

080

IntegratedRisk Management

070 Operations551 Segments &Marketing

058 Controlling120

Market &Operational Risk

074 IT & PMO015 Distribution090 Central Procurement

490

Workout &Restructuring

037

Product Management &TransactionServices

045

Corporate Banking &Structured Finance

028

SME030 Organisation150

Data & Analytics082Communication014

HR Management160

CHIEF RISKOFFICER

CHIEF OPERATION OFFICER

CHIEF RETAILOFFICER

CHIEF FINANCIALOFFICER

CHIEF EXECUTIVEOFFICER

CHIEF CORPORATEOFFICER

ORGANIZATIONAL CHARTSBERBANK CZ, A.S.Valid: 31.12.2017

Legend:

Board Rezort (BoD Member)

Committee

Department B – 1

Unit / B – 2

016 SBERBANK CZ | ANNUAL REPORT 2017ECONOMIC CONDITIONS

9. ECONOMIC CONDITIONS

In 2017, GDP growth was likely to approach 4.5%; it reached 5.0% in Q3 2017. High growth resulted from all the components of GDP, which grew quite strongly. The stable base of domestic consumption was followed by a year-on-year increase in capital expenditures, which compensated for the slight decline in the external balance contribution. The growth in investment expenditure was mainly driven by households and non-financial corporations. The favourable development was also reflected in further increases in wages and employment. The positive development continued in Europe. GDP growth in the European Union accelerated to 2.6%. Last year, the German economy reported its strongest growth in the last six years, and the Czech economy was influenced not only by this growth, but also by the fact that for the first time in its history, the Czech Republic became one of the top ten business partners of this most important European economy.

Year-on-year growth in gross value added (GVA) was getting stronger throughout 2017; it reached 4.2% in three quarters. This result was partly achieved thanks to the manufacturing industry, where car manufacturing was particularly successful. The positive result of non-manufacturing industries, which showed a stronger recovery of the power industry, also helped. In services, GVA grew by 3.0%, mainly because of the trade, transport, accommodation and catering industries. As in 2016, banking and insurance industries remained the most dynamic sectors. The growth of disposable household income in Q1 to Q3 caused a 9% increase in retail sales for non-food goods; only four EU countries showed higher growth rates.

The current account surplus of the balance of payments was sustained in the first three quarters of the year as well as a result of the traditionally positive balance of trade in goods and services. In this period, exports grew by 6.0% on a year-on-year basis. The usual commodity and territorial structure remained. Exports of cars and

machinery flourished and exports to EU countries grew. The year-on-year increase in the trade deficit for oil and gas and basic metals was reflected in a deterioration in the balance of trade with non-EU countries.

Consumer prices grew by 2.5% in Q3 2017 on a year-on-year basis, which was the highest increase since the beginning of the year. This was driven mainly by the accelerated rise in the prices of food and non-alcoholic beverages (5.7%), accompanied by higher housing price dynamics. By contrast, producer price inflation declined to 1.4%. Foreign trade prices decreased. They were negatively affected by the appreciation of the CZK in relation to the EUR from May.

Changes in monetary policy settings continued. The central bank decided to change its monetary policy rates for the first time since 2012. It was the first increase since 2008. This was reflected in market inter-bank rates. Credit rates increased slightly compared to the minimum which was reached at the end of 2016.

The excess on the labour market intensified and the percentage of unemployed declined slightly. The number of working people increased by 2% on a year-on-year basis. The growth in employment was significantly supported by a higher number of entrepreneurs and in terms of the industry, by trade, transport, accommodation and catering. The number of job vacancies offered by labour offices increased and exceeded the 200,000 threshold for the first time at the end of September. However, three-quarters of the vacancies required minimal qualifications. The decline in the general rate of unemployment helped to employ the long-term unemployed and people with basic education. Rising tensions on the labour market were reflected in dynamic wage growth; over the three quarters, the pace of wage growth reached its ten-year high (+4.1%) on a year-on-year basis.

Source: CSO, The Development of the Czech Economy in Q1 to Q3 2017CBA, Macroeconomic Prognosis, January 2018

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10.1 Introduction10.1.1. Meeting the Objectives in 2017In 2017, Sberbank CZ, a.s. successfully continued to develop its business activities. In all target customer segments – retail, SME and corporate banking – the Bank focused on the effective management of interest income and expenses as well as on an increase in income from fees with regard to the low market interest rates, which increased slightly at the end of the year. The aim of the client portfolio management was to retain and develop relationships with clients through cross-selling of products and services.

RETAIL BANKING RESULTS In retail banking, the Bank achieved several record sales results in a row. Despite the strongly competitive environment, the Bank was successful both in the number of clients and in the sale of key retail products – mortgage, consumer and micro-business loans. Significant year-on-year growth of the sales results of Sberbank CZ, a.s. was also reached in the sale of insurance and investments.

NEW PRODUCT OFFERINGS FOR CITIZENSIn January 2017, FAIR Savings PLUS became the best savings account of 2016, according to the results of the Financial Product 2016 competition of the financial portal Finparáda.cz. In the last three years, the savings accounts of Sberbank CZ, a.s. have scored in each announcement of results. FAIR Savings PLUS has been one of the key products among the best savings accounts for deposits of up to CZK 300,000 for a long time. At the end of 2017, we increased the interest on term deposits and expanded the zone for better interest rates on savings account as a result of the increase in market interest rates by the CNB.

For mortgage loans, mortgage refinancing rates were reduced to 1.59% p.a. As for FAIR Loans, we improved the benefit of the guaranteed best consumer loan and also guaranteed a reduction in the rate by 1% to a minimum of 4.8% p.a. at the beginning of the year. In the summer, the Bank also cut rates, and the FAIR Loans started at 4.8% p.a. A clear long-term competitive advantage of the FAIR Loan is the Bank’s fair approach and application of transparent interest rates, with the client learning the rate immediately on the basis of the amount financed and maturity. Thanks to the combination of these benefits, supported by a marketing campaign, we achieved record sales in the autumn.

In the field of investments, we prepared new products for clients, expanded one-off investments by a wide range of mutual funds, and also offered regular investment intermediation.

In March, Sberbank CZ, a.s. introduced a new product benefit of unsecured Business FAIR Loans and a FAIR Overdraft for entrepreneurs and companies with a turnover of up to CZK 25 million per year – a guaranteed reduction in the interest rate for the entire loan term up to the minimum possible rate of 3.99%. In the autumn, the Bank completely revised the settings of Business FAIR Loans, the negotiation of which is now faster, simpler and without unnecessary administration. The Bank provides non-purpose and unsecured Business FAIR Loans for entrepreneurs and small businesses from 4.44% p.a. up to CZK 2.5 million. These adjustments helped us to achieve record sales of Business FAIR Loans in 2017.

At the beginning of June 2017, Sberbank CZ, a.s. offered its clients a new contactless FAIR credit card. The card features an interest-free period of 45 days and offers the possibility of regular payments and is the only one on the market to offer SIPO, direct debits and other payment orders.

As far as the branch network is concerned, the planned modernisation of our branches continued in 2017, aimed at creating an environment that is more attractive for both the clients and employees of the Bank.

CORPORATE BANKING RESULTSDespite a slight decline in assets in the corporate clients segment, we managed to achieve a significant increase in revenues from both credit and non-credit activities. This good performance was also driven by the extraordinary volume of FX transactions before the expected release of the rate for the CZK against the EUR by the CNB. Clients not only from large corporations, but also from small and medium companies, were interested in hedging their foreign currency risk. The Structured Finance was also successful. Sberbank CZ, a.s. participated in several major syndicated loans.

ASSETS OF THE BANKSberbank CZ, a.s. owns four floors of the M-Palác administrative building located at Heršpická 5 in Brno and a building with land in Jihlava, at Benešova 15. The Bank intends to sell the building in Jihlava, including the built-up land, in 2018.

All movable assets (furniture, IT equipment, technological equipment of the buildings, etc.) are brought to rented premises of the Bank or its own premises and serve for the operation of 28 business branches and two corporate centres.

The net book value of the land, buildings and equipment amounted to CZK 263 million as of 31 December 2017 (CZK 282 million as of 31 December 2016).

10. REPORT OF THE MANAGEMENT BOARD

SBERBANK CZ | ANNUAL REPORT 2017REPORT OF THE MANAGEMENT BOARD

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STRATEGIC PROJECTS OF THE BANKIn addition to achieving the Bank’s business goals, one of the important priorities is to successfully implement key projects. Their aim is to develop and implement new products and services, increase the efficiency of the Bank’s internal processes and systems, and last but not least, to meet new regulatory requirements under regulations and standards such as IFRS 9, MiFID II, GDPR, etc.

An example of the successful increasing of the efficiency of internal processes is the robotisation of back office processes. Sberbank CZ, a.s. was one of the first banks in Europe to implement a software robot into its processes. It automated and accelerated the process of drawing on a record volume of approved loans, i.e. administrative back office processes governed by rules and not requiring complex decision making. The Bank intends to continue the robotisation process. It also continued to prepare key projects of multi-channel banking and its own debit cards, which will be completed and implemented in 2018.

There was a significant increase in “Intangible Assets” by 78% on a year-on-year basis, which was related mainly to project investments in IT technologies. As in 2016, the most important investments include new projects of multichannel electronic banking and a new process for issuing payment cards and processing card transactions.

10.1.2 Expected Bank development and financial position of the Bank in 2018Sberbank CZ, a.s. has sufficient capital and liquidity for its further development, as well as adequate reserves to cover any unforeseen and undesirable market developments. The financing of the Bank is secured through the stable volume of client deposits.

In corporate banking, we will continue to focus on revenue diversification and building a diversified portfolio of client commitments in 2018. In all segments, key parameters will remain the same – risk minimisation and increasing the number of active clients. The goal is to further increase sales volumes and revenues. Of course, there is consistent control of the Bank’s operating costs and increasing efficiency. The Bank is about to complete regulatory projects and key projects in IT technologies to make them more convenient for the clients.

On the basis of the results achieved so far, its business plans and projected conditions in the banking market, the management of Sberbank CZ, a.s. expects successful development of the economy to continue in 2018.

10.2 Awards received in 2017In 2017, Sberbank CZ, a.s. again continued the positive evaluation of products, services and social responsibilities from previous years.

Finparáda.cz announced the results of the seventh year of the competition “Finparáda.cz – Financial Product of the Year 2017”. Sberbank CZ won third place with FAIR Savings PLUS. The savings accounts offered by Sberbank CZ, a.s. have regularly ranked among the best in this competition in recent years. All the financial products of the selected types that are offered in the Czech Republic by banks, insurance companies, and pension and investment companies are automatically entered in the competition. The three best products in each category are always announced.

In 2017, Brand Finance announced Sberbank as the sixth most valuable banking brand in Europe. The value of Sberbank grew by 33% to USD 9.1 billion on a year-on-year basis. In 2017, the Bank improved its position from 35th to 24th place worldwide.

Brands are rated by the independent company Brand Finance, which is a leading company in the field of assessing brand values and a consultancy company.

Sberbank is the only Russian company among the TOP 100 bank brands and the only Russian bank brand in the Brand Finance 500.

In November 2017, Sberbank CZ obtained a certificate from CI2, o.p.s., which is a guarantor of the independent Czech programme SLEDUJEME/SNIŽUJEME CO2 (WE MONITOR/REDUCE CO2 EMISSIONS). Sberbank CZ was the first bank in the Czech Republic to join the programme. The certification certifies a 13.6% reduction in greenhouse gases, which represents a year-on-year saving of 259 tonnes of CO2, and also the involvement in a voluntary climate action programme in the business sector. The requirement for obtaining this certificate in the first phase is monitoring, whereas in the next phase businesses must reduce greenhouse gas emissions related to their activities. The programme SLEDUJEME/SNIŽUJEME CO2 supporting climate protection is the only one of its kind in the Czech Republic. It is open to


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businesses, public institutions, municipalities and other entities. The programme runs under the auspices of the Ministry of the Environment.

We greatly appreciate the awards and certificates received, as they are proof of our responsibility towards our clients and society as a whole.

10.3. Individual Areas10.3.1 Retail bankingThe retail banking unit of Sberbank CZ, a.s. completed another record-breaking year. Retail banking is gradually becoming a key segment for Sberbank CZ, a.s. in the Czech Republic. Despite the fiercely competitive environment, the Bank increased its number of clients and was successful in the sale of key retail products (consumer loans, loan consolidation, savings accounts and mortgage loans). The Bank has successfully developed cooperation with external sales networks that broker banking products, in particular consumer loans, loan consolidation, mortgage loans and business loans. In 2017, the Bank began to make even greater use of direct marketing aimed at our own clients. They used the advantageous offers of consumer loans or transition to a more advantageous type of current and savings accounts.

From the perspective of business results, the Retail segment saw significant growth in the volume of loans provided by 26% (from CZK 24.7 billion in 2016 to CZK 31.1 billion in 2017). In particular, the sales of mortgages and consumer loans increased significantly.

Even more than the increase in the number of clients, we were pleased with the positive development in the portfolio structure. The Bank pursued its business strategy focused on affluent clients. From the Bank’s perspective, the revenue growth per client by almost 20%, documenting the fact that the increasing number of products used is crucial. According to regular feedback, our clients were more satisfied with our services, as confirmed by the results of Mystery Shopping and a rapidly increasing NPS (Net Promoter Score).

We continued to modify the interior of our branches according to high internal standards to provide our clients with comfort. In 2017, the branches in Prague at Anděl, Vinohradská and Lazarská were modified.

Our digital sales channel (e-shop) helped greatly to achieve record results; for example, it contributed to the sales of consumer loans and consolidations and savings accounts by approximately 14%. It enables the clients to use our services easily and conveniently throughout the Czech Republic without having to visit one of our branches.

In the course of the year, Sberbank CZ, a.s. continued to adapt its products to make them more attractive for private individuals as well as for the Micro segment. For example, in February 2017, the Bank improved its client benefit of the guaranteed best interest rate and added an interest rate reduction of 1%. In addition to improving this benefit, in August 2017, the Bank further significantly reduced interest rates on FAIR Loans to their historical minimum. Thanks to the Bank’s fair approach and its transparent interest rates, which are disclosed to the client immediately on the basis of the amount and maturity of the loan, the market share of the FAIR Loan increased further and we reached the historically largest volume of FAIR Loan sales during the Bank’s existence.

Mortgage products under the name FAIR Mortgage continue to grow on a year-on-year basis and, thanks to the increased interest of clients, it was the strongest year in terms of their sales, with new mortgages approaching CZK 8 billion. The sustained growth is brought especially by a simpler and faster process for providing mortgage loans and an attractive price offer.

In June of the last year, we introduced a new Sberbank credit card that can, with its features, efficiently replace a current bank account, overdraft facility and debit card. It includes the option to use an interest-free credit limit of up to 45 days not only for payments but also for withdrawing cash at ATMs. The Sberbank credit card is the only card in the market that offers the setting of SIPO, direct debits and other payment orders and using the interest-free period for regular payments for rent, energy, telecommunications etc.

Sberbank CZ, a.s. savings accounts are still one of the most attractive savings accounts on the Czech market, which is confirmed by the fact that FAIR Saving Plus has regularly taken leading positions in the voting competition of the renowned financial portal Finparáda.cz in the last few years and the clients are still interested in the safe and advantageous deposit of a contingency reserve.


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Additional services are still popular for the Bank’s clients, particularly in the field of bank insurance and investments. The Bank provides repayment insurance products for consumer and mortgage accounts and insurance products for payment cards, such as travel insurance or card and personal item insurance in cooperation with BNP Paribas Cardif Pojištovna as the insurance provider. Property insurance is offered in cooperation with Generali Pojišťovna. More and more clients use additional investment services. The Bank offers its clients an investment advisory service. It provides a wide range of investment funds from NN Investments Partners and Generali Investments CEE. It also offers the opportunity to invest in a number of domestic and foreign bonds.

10.3.2 SME bankingSME clients traditionally represent one of the key segments for the Bank. Loans granted to SME clients account for 34% (37% in 2016) of the Bank’s credit business, which also includes the Corporate, SME and Retail segments; the slight decrease occurred primarily because of the rapid growth of the Retail segment. SME Banking spans three specific subsegments: traditional corporate SME banking with nine regional teams, a dedicated team for real estate projects (Real Estate), and a team for the public sector.

The SME division offers clients a wide range of banking services and products. This starts with cash management, through appreciation of funds, various forms of financing, including financing for foreign trade, up to the hedging of payment, currency and interest rate risks.

SME Banking was very successful in 2017. The termination of the Czech National Bank’s intervention scheme at the beginning of the year triggered the need of clients and companies that were not our clients to re-hedge foreign currency risk, which multiplied the SME’s volume of transactions. SME was very successful in attracting new deposits in the form of savings accounts and savings accounts with a notice period, including through the accumulation of working balances on the current accounts of newly acquired clients. The income from deposits and from customer hedging transactions was the main reason why the income plan of the SME division was exceeded in 2017.

In 2016, a strategy was newly formulated for the SME segment and its implementation commenced; this continued in 2017. The new strategy is based on the quality of bankers in the business network, simplified internal processes and the resulting simplified client service, fair prices for services, long-term relationships with clients and an active approach to prospective clients.

The first steps in the implementation of strategic changes included a leaner management structure, decisions on strengthening the capacity of the sales network and changes leading to an increase in the quality of management and business work. Steps were also initiated to streamline the loan process – the backbone of the business process. From the client’s perspective, these changes will translate into a significant acceleration of decision making on the conditions for the availability of loan products.

These and many other major or minor changes, measures, and innovations in SME banking, combined with the favourable macroeconomic situation and the more limited but persistent business opportunities of clients and target clients of Sberbank CZ, a.s. towards Eastern Europe, create conditions for the fulfilment of significant growth objectives and the achievement of the high ambitions of SME banking in 2018.

10.3.3 Corporate BankingLast year was both successful and challenging for the Corporate Banking division. Our clients include large companies and corporations, non-banking financial institutions and the most important entities in the public sector. This year, our advisors and product specialists continued to provide customised solutions, particularly in the area of financing, financial risk management and transaction banking.

In 2017, interest rates and risk premiums on loans continued to decline as a result of extreme liquidity on financial markets, as well as strong competition. On the other hand, economic growth and related investment activity in the corporate sector had a positive impact.

We dealt with several major events that had an impact on the division’s results in the last year. In the first half of the year, it was mainly the refinancing of several existing significant exposures of the Bank to clients from the EPH and PPF groups. Thanks to our good relationships with these clients, we managed to remain a major part of the group of financing banks and the impact on the portfolio was not so dramatic. We also managed to acquire prominent new borrowers and the total production of new assets therefore reached CZK 2.35 billion. In spite of our efforts, we did not manage to increase the volume of assets on a year-on-year basis and we refinanced a major part of our existing portfolio.

Despite a slight decline in assets, our team managed to significantly increase revenues from both credit and non-credit activities. This increase by almost 20% was achieved particularly as a result of higher average risk premiums on clients’ transactions and a rise in one-off


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fees for structured financing transactions, as well as because of the activities of new non-credit clients in the area of currency and interest rate risk management. As result, we contributed an amount of over CZK 317 million to the Bank’s income.

Despite the significant growth of revenues, the risk profile of the portfolio did not deteriorate, which is one of our key performance indicators. Except for one client default in our portfolio, there were no significant negative events or major deterioration in the performance of our counterparties. This default and the associated creation of loss provisions reduced our contribution to the Bank’s income; however, there is still a chance that our claim will be at least partially discharged.

In 2018, we will continue to focus on revenue diversification by increasing the share of non-interest revenue in the client portfolio, particularly in the provision of currency and interest rate risks. We are also striving to build a diversified portfolio of client commitments that will be more resistant to fluctuations in the market. This strategy also includes increasing the number of active clients. Risk and its minimisation will remain a key parameter in our thinking and approach to new business opportunities.

10.3.4 Export & Trade FinanceIn the field of Export & Trade Finance (ETF), the Bank focused on bank guarantee products, the financing of receivables from export documentary letters of credit, export buyer credits, and pre-export financing with insurance taken out with EGAP in 2017. Compared to 2016, we were particularly successful in the area of guarantees, which grew by 39% on a year-on-year basis. Thanks to cooperation with banks within the groups, we focused mainly on the markets in the Russian Federation and in other countries of the former Soviet Union. The detailed knowledge of these countries is also provided to our clients – exporters that can choose from a wide range of products when financing individual transactions. Using a global network of partner banks, we helped Czech exporters with financing in less traditional destinations, such as South American countries or Saudi Arabia. In 2018, we would like to strengthen our position in financing trade with the Russian Federation and, at the same time, provide our clients with access to other export territories.

The marketing activities in 2017 focused both on operations within the Bank (e.g. a business breakfast for clients aimed at the products of Export & Trade Finance and Global Markets), but also on organising round table discussions with exporters for the wider professional public.

10.3.5 Global Markets GLOBAL MARKETS TRADING In the course of 2017, the Global Markets organisational unit of Sberbank CZ, a.s. extended its business cooperation with banking counterparties on the financial markets. Cooperation with Sberbank CIB Russia also continued, especially in transactions in Russian roubles (RUB), allowing Sberbank CZ, a.s. to consolidate its position as the leading service provider in RUB. We continued to intensify our cooperation with all affiliated banks within the Sberbank Europe group in the field of Global Markets, both in the money and derivative markets.

The activity of Global Markets grew in both areas of its main focus, i.e. in the area of the effective management of the short-term liquidity of the Bank and in the area of providing the products of Global Markets to corporate and institutional clients. All trading activities grew year-on-year in terms of trading volumes and the number of active clients, as well as the number of transactions concluded and revenues. In 2017, Global Markets showed increased profitability, which was associated with arbitrage opportunities on the local CZK market.

GLOBAL MARKETS SALESIn 2017, the majority of foreign exchange transactions consisted of spot exchange transactions; however, in connection with the Bank’s clients’ hedging of foreign exchange risks, the number of derivative transactions, especially currency futures, increased significantly. The main activity of clients aimed at exchange rate risk hedging was recorded during Q1 2017 before the termination of the Czech National Bank’s intervention scheme.

Throughout 2017, the Bank’s clients were provided with interest rates in CZK that were still relatively low and concluded interest rate hedging products, such as IRS (interest rate swaps), with maturities of up to 10 years with Global Markets. Global Markets also contributed significantly to ensuring a stable liquidity position for all major currencies. In addition to local currency transactions, the rouble continues to play a significant role in currency and deposit transactions, which emphasises the expertise of Sberbank CZ in the rouble market.

An important part of the product innovation was the launch of the Sberbank electronic platform to enable clients to trade in the spot foreign exchange market in online mode.


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As far as securities are concerned, clients continued to favour primarily safe investments with guaranteed interest income. In 2017, the Bank continued its standard offer of bonds and at the same time, expanded its offer of mutual funds.

Overall, Global Markets achieved several significant successes compared to 2016. Revenues in all product areas increased, particularly revenues from foreign exchange transactions and revenues from deposit transactions. The introduction of the e-FX platform into the active Global Market offering to clients was also considered a major shift in the automation of processes and products.

In 2018, Global Markets will continue to strive to acquire target clients of the Bank in all segments, and will also focus on the development of combined product packages for clients, where Global Markets Sales is a major component. We will also continue to distribute the e-FX platform intensively to both existing and, especially, target clients of the Bank.

10.3.6 ITIn 2017, IT contributed to the success of the Bank by implementing key banking projects. At the end of the first quarter, we launched a new e-FX platform for automatic trading of currency pairs for customers. At the end of the year, we implemented a new tool for account managers to improve financial planning for clients. In the course of the year, we made changes in our IT systems that were related to legislative requirements, e.g. to the amendment to the Payment System Act or MiFID II.

We also initiated new legislative processes which will be completed in 2018, the most important of which are GDPR, IFRS 9 and PSD2. The Bank has also significantly improved its data analysis capabilities by expanding its data warehouse, in particular in the field of analytical data for risk management, but also in other fields, e.g. financial management or marketing. In the third quarter, we implemented the key integration components M24 and CM24, which serve as a technological base for new mobile and Internet banking and for the issuance of our own payment cards, but which also represent investment in the future for faster and more flexible development of other applications. At the end of the year, key new Internet and mobile banking projects, as well as the new payment cards project, were tested – both projects will be launched for clients in 2018.

We have stabilised the organisational structure of the IT organisational unit and increased the number of IT specialists, thereby strengthening internal competencies in key IT areas and increasing

substitutability. In order to increase work efficiency, we have implemented several basic ITIL processes, the most important of which are change management and release management. We have started to use the JIRA tool fully in defect management and project management. To improve communication and project work, we have implemented Skype for Business and initiated the migration to SharePoint 2016.

We continue to address the standardisation of systems and the transition of critical systems to 24/7 operation. We have analysed the infrastructure for the high-availability operation and changed the supervisory centre mode to 24/7 three-shift operation. Standby duties have been introduced in other teams of administrators to support the system.

In 2017, we completely modernised the monitoring system, implemented a new PRTG tool and established a monitoring standard. We continue to improve monitoring; the Bank analyses and assesses the outputs of monitoring applications.

At the end of 2017, we completed the implementation of and migration to the Avamar device for system backups, started to work on increasing the number of data lines for all branches, and increased the availability of the Contact Centre.

10.3.7 Digital BankingOnline sales of banking products continued to grow in 2017 thanks to the improved performance of our online campaigns. Although we did not record more visits to our e-shop than in the previous year, we achieved record sales of loans, with a year-on-year increase of 24% and an increase in the number of applications by 19%. The number of registered users of Internet banking increased by 5% on a year-on-year basis. The number of active users, i.e. users who sign into the application at least once a month, remains at the same level as in 2016.

In 2017, we continued to develop the Digital Banking team, which is responsible for development and innovation in all forms of digital channels and services for end customers, as well as for the further development of online sales. There have been a number of improvements and changes in online sales and service. The positive change was noticed by users of our social networks thanks to the quality content and fast responses to their posts. We also managed to modernise the look of our corporate website www.sberbank.cz.

For the entire Sberbank CZ, a.s., the strategic priority of 2017 was the project of the new Internet and mobile banking service, which will be launched in 2018. We plan


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to expand our e-shop with current accounts in 2018. Clients will therefore be able to open a current account at home without having to visit one of our branches.

10.3.8 Human Resources ManagementSberbank CZ, a.s. sees human capital management as a key part of the strategic management of the Bank. Employees represent the greatest potential in building long-term relationships with our clients to achieve business objectives and create a well-functioning foundation for all the activities of the Bank.

In 2017, we focused on the completion of the effective organisational structure of the Bank and on the strengthening and stabilisation of core business and support teams. We prioritised the implementation of regulatory projects and measures and adjustment of internal guidelines. Last but not least, we also focused on the implementation of motivational programmes for employees and organising educational projects.

Other priorities included the retention of employees, the use of new methods of recruiting, improving access to education and development for all employees and support for social life within the Bank and occupational health and safety.

In the second half of 2017, we completed the projects to strengthen the brand of Sberbank CZ as a preferred employer, and prepared a new system of employee benefits and remuneration of selected business teams and the concept of the development of managers and key employees scheduled to be launched in 2018.

From the beginning of 2018, Sberbank CZ, a.s. will implement a new group system to evaluate and manage performance that reflects the values and competencies.

10.3.9 Marketing In 2017, the Bank’s marketing activities focused on two main areas: supporting sales of key products (consumer loans, mortgage loans, business loans, and savings accounts) and raising awareness of the Sberbank CZ brand and a preference for it among end customers.

The Bank continued to focus on growth throughout the year, especially in the area of loans. Customer loans were supported by four strong campaigns throughout 2017. The main channels remained mass media, especially television and online media.

In the second half of the year, we also supported the brand with campaigns aimed at selling investment loans for

entrepreneurs. We are pleased that the interest of new clients made it possible to achieve record sales in this area.

Significant support, including print and outdoor advertising, was also deployed during the year in the modification and relocation of selected branches of Sberbank CZ, a.s. to more convenient and accessible sites. We believe that the convenience of our clients will thus continue to increase.

The advertising campaigns and marketing activities met the set objectives and Sberbank CZ brand awareness has continued to grow on a year-on-year basis. The Bank also expects strong marketing support and further improvement of brand and product awareness in 2018.

10.3.10 CommunicationThroughout the year, the Communication organisational unit informed employees, clients, media and the general public on all of the Bank’s key activities, such as the introduction of a new product line, the Bank’s financial performance, meeting objectives and the implementation of key projects. It conducted open and interactive communication across all major communication groups, mainly thanks to the active participation of members of the Management Board and senior management in internal and external communications.

The Bank communicated with the public primarily through the media. When working with editors, we put emphasis on speed and the clarity of the information provided. The Bank informed clients and the public regularly through its website and social networks.

In internal communications, we put the emphasis on the regular personal communication of employees with the Management Board. Regular Town Hall meetings are organised to present the economic results and fulfilment of the goals and projects of the Bank; the Management Board visits regional teams and branches of the Bank regularly to obtain opinions and feedback from employees at skip-level meetings and other informal events.

Another important part of the internal communication strategy is deepening the corporate culture focused on the customer, collaboration and leadership. For example, we supported corporate culture and employee commitment by the selection of the best employees and teams of the year.

As part of its event management and sponsorship activities, the Bank organised and supported dozens of important business, cultural, social, charitable and sports events.


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In 2017, social responsibility was also an important part of the activities of the Communication organisational unit and of the entire Bank. Motivated employees had the opportunity to nominate their applications for aid through the Sberbank CZ Endowment Fund, engage in volunteer activities and support several non-profit organisations. The Bank increasingly involved its clients and friends in the CSR activities. More information about the CSR activities can be found in the chapter 15 Social Responsibility (see p. 044).

10.3.11 Comment on IFRS Financial ResultsIn accordance with the International Financial Reporting Standards (IFRS), Sberbank CZ, a.s. posted a net profit of CZK 424 million for 2017. It is again a significant increase compared to 2016. This is the result of three main factors. The first is an increase in “Net interest income” by CZK 107 million. The second factor is a decrease in “Other operating expenses” by CZK 35 million. Finally, the third factor is the growth of “Net trading income” by CZK 75 million. The sum of these three items of the profit contributed to profit growth of CZK 152 million.

STATEMENT OF COMPREHENSIVE INCOME“Net interest income” grew by CZK 107 million on a year-on-year basis, which represents an increase of 6.9%. While “Interest income and similar income” decreased slightly, by 0.6%, the Bank achieved large savings in “Interest expenses and similar expenses”. Their volume decreased by 31%. A decrease in interest expenses was achieved by reducing the interest rates on the deposits received from clients.

“Net income from fees and commissions” increased by 11.8% on a year-on-year basis. The Bank showed an increase in fee income in multiple areas. The volume of fees collected associated with loans provided decreased slightly (by 4%) in 2017; however, the income from fees for foreign currency transactions grew by more than 14%. The fees for foreign payments also grew, by 18%. Both these increases were largely due to the termination of the foreign exchange rate liability by the CNB and the associated higher number of foreign currency transactions.

“Net trading income” increased by almost 76% on a year-on-year basis to a total of CZK 174 million. The reason for this increase is almost exclusively revenues from exchange rate differences, which are ten times larger than in 2016. It was possible to achieve these revenues as a result of the appreciation of the CZK after the termination of CNB interventions in the foreign exchange market.

“Net income from financial investments” was not realised in 2017.

“Impairment losses on loans” in 2017 were almost at the same level as in 2016 on a year-on-year basis. They increased by less than half a percent. This was mainly due to a high-quality credit portfolio, the successful settlement of outstanding loans and, ultimately, the favourable macroeconomic situation.

“Net reserves created” had the character of a net creation of CZK 4 million in 2017. Compared to 2016, the amount is more than 80% lower because the Bank did not expect further increases in significant future costs.

“Administrative expenses” grew by 4% in 2017. This was caused by an increase in all the components of administrative expenses. The highest increase by 5.6% (CZK 46 million) was shown in personnel costs, which was due to a larger number of internal employees, by means of whom we are trying to replace external and more financially demanding resources. Another factor is the rise in wage levels in the Czech Republic, which requires higher wages to maintain competitiveness.

“Other operating expenses” decreased on a year-on-year basis by 34.7% in 2017. This decrease was primarily caused by a reduction in the contribution to the Crisis Management Fund by a total of CZK 22 million, as well as a reduction in other operating costs by CZK 15 million, which in 2016 included a partial depreciation of the investment in the new multichannel banking that was charged in the amount of CZK 19 million as a result of infrastructure project changes.

“Income tax” increased by 67% on a year-on-year basis, which is associated with an increase in pre-tax profit. Deferred tax and the estimation of tax due were not affected by any significant facts that would cause the effective tax rate, which was approximately 20%, to deviate significantly from the nominal rate.

STATEMENT OF FINANCIAL STANDINGThe total assets of the bank increased by more than 13% on a year-on-year basis to a total of CZK 81.5 billion. The increase is mainly due to an increase in “Loans and credits to clients” by almost CZK 5 billion, as well as an increase in the CNB contribution by more than CZK 4.3 billion.

ASSETS“Cash” and “Loans and advances to banks” increased by approximately one-third on a year-on-year basis. This increase was mainly due to the increase in deposits with the central bank by CZK 4.3 billion. On the other hand,


025

cash fell by 3.4% on a year-on-year basis. The Bank also continues to hold a very strong liquidity position. The share of highly liquid assets in the total assets as of the end of 2017 amounts to almost 24%, as compared to 21% at the end of 2016.

“Loans and credit to clients” grew by 8.8% on a year-on-year basis and, by the end of 2017, amounted to CZK 60.5 billion. The volume of loans increased, mostly thanks to the products of the Retail Banking segment, which grew by almost 25%.

At the end of 2016, the Bank sold all the government bonds held in its portfolio of securities. The Bank assessed the current situation on the financial market and decided to sell the bonds in order to realise the income. This approach was also maintained in 2017 and the Bank did not buy any other “Investment securities”.

“Intangible assets” increased significantly, by 78%, on a year-on-year basis. The increase is mainly related to project investments in information technology, which were in the process of acquisition as of the date of the annual financial statements. As in 2016, the most important projects include new multichannel electronic banking and a new process for issuing payment cards and processing card transactions.

The development of other Bank assets is connected with normal operation. There were no significant events that could have a significant impact on the movement of these items.

LIABILITIESThe increase of “Payables to banks” by more than 55% is related to the release of the foreign exchange rate liability by the CNB. Some international institutions use long-term holdings of the strengthening CZK to obtain additional revenues. For example, Term Deposits from foreign banks with Sberbank CZ rose from CZK 2.8 billion in 2016 to CZK 4.4 billion at the end of 2017.

“Payables to clients”, which represent the main source of financing of the Bank’s assets, grew by 15% to CZK 64.1 billion on a year-to-year basis. This amount was mainly achieved thanks to the growth of the volumes in clients’ current accounts by more than 20% (CZK 4.4 million), as well as to increased interest in Term Deposits, particularly from abroad.

“Payables from debt securities issued” decreased on a year-on-year basis by more than 41%. The cause is the due repayment of two issues of mortgage bonds. The portfolio of issued debt securities consists almost exclusively of recently issued mortgage bonds. The issued

deposit bills of exchange, which in the past formed a significant portion of these payables, are now in decline on the Czech market and constitute only a fraction of the total volume.

Other liabilities of the Bank increased by 2% to a total of CZK 914 million. For the most part, this item of the balance sheet is formed by temporary and short-term liabilities arising from the continued clearance of domestic and foreign payment transactions and can show considerable volatility.

“Subordinated liabilities” shown by the Bank in the amount of CZK 179 million as of the end of 2017 represent the subordinated debt from the parent company Sberbank Europe AG, the sole shareholder of the Bank. This liability, which is part of Tier 2 regulatory capital, has been adopted by the Bank in order to comply with the internally prescribed capital buffer that aims to ensure compliance with regulatory requirements for the total capital adequacy of the Bank under standard market conditions.

EQUITYThe equity of the Bank as of the end of 2017 amounted to CZK 8.8 billion. The increase compared to 2016 is essentially composed of profit for the accounting period of 2017. There was no increase in the equity by the shareholder in the course of 2017. There was also no dividend payment. The profit from 2016, following the legal allocation to the statutory reserve fund, remained part of equity as “Retained earnings”.

3 Quickly liquid assets are the sum of the lines “Cash and deposits at central banks” and “Receivables from banks” and “Investment securities – realisable” in the “Statement of Financial Standing” presented in the annual financial statements.

4 Other liabilities of the Bank comprise the following items of the “Statement of Financial Standing” presented in the annual financial statements: Income tax payable, Other liabilities, Accrued revenues and expenses, and Reserves.


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PRODUCTS FOR SME CLIENTS AND CORPORATIONS WITH AN ANNUAL TURNOVER FROM CZK 1.25 BILLION In 2017, the product range was expanded by a standardised cash pooling product designed for efficient liquidity management within business groups.

The Bank offers the Business Current Account to corporate clients for everyday banking. In addition to domestic payments, clients can also use a special Sberbank payment within the international payment system, discounted payments in euros to selected banks in the Sberbank Group and discounted incoming and outgoing rouble payments from/to any bank in Russia.

For the appreciation of available funds, the Bank offers a Savings Account for corporate clients and term deposits. In relation to the appreciation of funds, the Bank also offers solutions customised to meet the needs of each client through Global Markets.

Sberbank CZ, a.s. demonstrates advantageous conditions and expertise in products and services related to the rouble. In this area, Sberbank CZ, a.s. secured a strong market position, mainly thanks to the rapid processing of transactions and a strong partner in the RUB market. In the area of risk hedging and the foreign exchange market, Sberbank CZ, a.s. offers a variety of hedging options according to the individual needs of clients.

The Bank supports Czech companies that wish to enter foreign markets where Sberbank CZ, a.s. operates in the process of opening accounts. These services operate in cooperation with partner Sberbank branches in Russia, Croatia, Slovenia, Serbia, Bosnia and Herzegovina and Hungary.

Sberbank CZ, a.s. offers a full range of financing to companies – operational financing, investment loans, structured financing, etc. The Bank’s financing services are based on an individual approach that takes into account the specific requirements of each client. Clients from the corporate sector who focus on investment and property development can take advantage of the special financing Real Estate Department, which has a long tradition at the Bank. The Bank also offers specialised products in the public and agricultural sectors. An integral part of this is financing with the support of Českomoravská záruční a rozvojová banka, a.s.

The financing of export and foreign trade is another pillar of the Bank’s offer. Sberbank CZ, a.s. offers specialised products and services, including the use of the knowledge and base of the Sberbank Group.

PRODUCTS FOR ENTREPRENEURS AND SMALL BUSINESSES WITH A TURNOVER OF UP TO CZK 25 MILLIONIn 2017, we primarily focused on adjusting loan products. At the beginning of the year, we improved Business FAIR Loans by adding the benefit of a guaranteed reduced rate. If a client with an unsecured Business FAIR Loan receives a better offer from the competition, Sberbank CZ, a.s. will even up or reduce the interest rate up to a minimum of 3.99% p.a.

The Bank completely revised the setting of Business FAIR Loans in the autumn. Their negotiation is now much faster, simpler and without unnecessary administration. In the case of lower amounts, clients only need to complete a short application and submit financial statements for one year; no tax and social security clearance certificate is needed. The client is informed about the interest rate before submitting an application for funding, which is clearly a competitive advantage. Clients therefore know in advance at what rate the loan will be provided. The Bank provides non-purpose and unsecured Business FAIR Loans for entrepreneurs and small businesses from 4.44% p.a. Clients only pay the interest; the Bank has completely cancelled all other fees. An unsecured loan can be up to CZK 2.5 million. The Bank assesses the loans individually and offers financing tailored to the amount and rate that the client requests. These adjustments helped us to achieve record sales of Business FAIR Loans in 2017.

Whereas the offer of current accounts for entrepreneurs and small businesses underwent a major change in 2016, the year 2017 did not bring any changes of such magnitude. Corporate clients can choose from three types of accounts, MINI, ACTIVE (AKTIV) or OPTIMAL, exactly according to their individual needs, whether they are start-ups or established companies. Clients have access to convenient international payments, and accounts denominated in foreign currencies are free of charge. Current accounts and savings accounts are evaluated positively by our clients; the FAIR Savings PLUS saving account has been one of the most advantageous products in its category for a long time.

PRODUCTS FOR THE RETAIL SEGMENTRetail clients can use the entire line of FAIR (FÉR) products for all their financial needs; this line is characterised by the fact that clients pay no fees, know all the conditions in advance and can check prices quickly and easily. There was another special offer of loan products in 2017.

For mortgage loans, mortgage refinancing rates were reduced to 1.59% p.a. As for FAIR Loans, we improved the benefit of the guaranteed best consumer loan and also guaranteed a reduction in the rate by 1%. If a client

SBERBANK CZ | ANNUAL REPORT 2017PRODUCTS AND SERVICES

11. PRODUCTS AND SERVICES

027

with a FAIR Loan finds a better competitive offer in the market, Sberbank CZ, a.s. will not only even it up but also reduce the rate by up to 1% to up to a minimum possible rate of 4.8% p.a. A clear long-term competitive advantage of the FAIR loan is the fact that the client learns the rate immediately on the basis of the amount financed and maturity. This, combined with the benefit of a guaranteed reduction in the rate of up to 1%, makes the FAIR Loan even more attractive. In the summer, the Bank also cut rates, and FAIR Loans started at a rate of 4.8% p.a. Thanks to the attractive new offer supported by the marketing campaign, we achieved record autumn sales.

In the area of savings accounts, FAIR Savings PLUS has been one of the key products among the best savings accounts for deposits of up to CZK 300,000 for a long time. Clients that also use an AKTIV, OPTIMAL or PODNIKATEL FAIR Account have been automatically provided with a better interest rate. Because of the increase in market interest rates, at the end of 2017, we increased the interest on term deposits, which are a good instrument for conservative clients.

As part of the appreciation of funds, the Bank offers the clients an investment advice service. The long-term offer of mutual funds of NN Investment Partners was expanded by a wide range of mutual funds of Generali Investments CEE. In addition to one-off investments in mutual funds and bonds, it also offers regular investment intermediation. Clients are thus able to spread their available funds optimally between classic savings products and investment products with potentially higher appreciation.

The FAIR Account, which offers three variants – MINI, ACTIVE (AKTIV) and OPTIMAL – strengthened its market position mainly through zero fees for active clients, advantageous savings for active users and the option of maintaining accounts in foreign currencies free of charge. The OPTIMAL FAIR Account again ranked very high in independent comparisons as a current account suitable for affluent clients. During the year, we also expanded our account offer with a special offer of a FAIR Account for students and a Basic Account respecting the requirements of the Payment System Act.

SBERBANK CZ | ANNUAL REPORT 2017PRODUCTS AND SERVICES

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12.1. IntroductionThe Bank maintains a prudent and balanced approach to risk management in order to achieve reasonable returns at an acceptable risk level. The applicable regulations and risk strategy of the Bank constitute the basis for this. The Bank uses a system of regulatory and internal limits, the amount of and compliance with which are regularly monitored, and in cooperation with its parent company continuously develops advanced risk management tools.

The major general principles of the risk management process are the optimisation of the relationship between risk and the expected return, an effective internal control system, the segregation of duties, the identification and analysis of risks, portfolio diversification and, last but not least, ensuring the accuracy and completeness of data in banking systems. Bank management is regularly informed about the degree of risk taken, and the risk management system is monitored and evaluated.

Within the organisational structure of risk management, the Management Board has the central position; the Management Board determines the risk management strategy, approves the risk appetite of the Bank with regard to the medium-term strategy of the bank, approves all key documents in the area of risk management, approves the models for credit risk management, and decides on significant risk positions.

Risk management is ensured by the Risk Management Division, which is managed by a designated member of the Management Board. The organisational units under the Risk Management Division analyse the Bank’s risk positions, check compliance with limits, provide information on the results that are identified and approve risk positions within the established authority.

The following committees form an essential part of the risk management system:

Risk Committee, to which the Management Board of the Bank has delegated decision making in the following areas:

• approving the risk management principles and basic methods, limits, scenario assumptions and any other parameters used in the risk management process, monitoring credit, market and operational risks (including compliance with limits), and approving corrections when limits are exceeded or adverse development trends occur,

• defining the principles of internal guidelines on risk management,

• approving the methodology of the creation, monitoring and updating of models for risk management and approving other models for risk management, and

• monitoring the adequacy, reliability and effectiveness of internal guidelines, procedures and limits for risk management.

Asset & Liability Committee, which primarily considers the current and prospective interest and currency risks in the investment portfolio, as well as liquidity risks, financing and management of the regulatory capital in order to optimise the revenue-risk profile.

Credit Committee, which in particular decides on the acceptance of credit risk in relation to individual counterparties, notably by approving the amount of new exposures and regular revisions of the credit risk of the existing exposures.

Distressed Assets Committee, which in particular makes decisions in the following areas:

• approving the principles of management of debt at risk,

• considering and approving internal guidelines, methodologies and work procedures related to the management of debt at risk,

• setting principles for increasing the commitment of clients with respect to debt at risk,

• deciding on how to address major individual claims at risk within the extent of the powers granted to the Committee,

• setting rules for the management of individually insignificant claims at risk,

• monitoring the development of debt at risk and taking corrective measures in the event of undesirable developments, making decisions on granting approval powers for dealing with debt at risk to employees of the Problematic Receivable Unit, the Manager of the Problematic Receivable Unit and the CRO.

The Committee members are members of the Management Board of the Bank and executive officers from the respective areas of risk management. Information on the Executive Committees of the Bank’s Management Board, including their composition, can be found on page 010 hereof.

The Risk Management Division consists of the following five organisational units:

• Integrated Risk Management, which is involved in the preparation of the risk management strategy and is responsible for monitoring the capital adequacy ratio and measuring the risk exposure in the Bank’s credit portfolio,

12. RISK MANAGEMENT

SBERBANK CZ | ANNUAL REPORT 2017RISK MANAGEMENT

029

• Market & Operational Risk, which is responsible for managing market risk, operational risk and liquidity risk,

• Credit Risk, which is responsible for credit risk management and establishing the credit processes,

• Underwriting, which assess the credit risk level received by the Bank and approves/recommends decisions on the limits for the Bank’s counterparties, and

• Workout & Restructuring, which is responsible for debt recovery.

12.2. Capital Adequacy RatioTo determine the capital requirement, the Bank uses a standardised approach to credit risk and operational risk. Given that the Bank holds a small trading portfolio, there is no capital requirement for market risk.

Forecasts of the Bank’s capital adequacy ratio are prepared regularly on the basis of the data on the existing structure of assets and their projected future development, in particular in the area of loans provided. There is an Emergency Action Plan in the event of emergency situations having a negative effect on the Bank’s capital adequacy ratio.

In accordance with regulatory requirements, the Bank has sufficient capital to cover risks.

In accordance with the requirements of Pillar II of the Basel Capital Accord known as Basel III, at least once

a year the Bank evaluates the adequacy of its capital with respect to all significant risks (Internal Capital Adequacy Assessment Process).

12.3. Credit RiskProviding loan products is one of the main business activities of the bank. This corresponds to the emphasis that is placed on credit risk management. The Bank applies a conservative policy to managing credit risks. Each transaction that is knowingly accepted by the Bank should generate a profit which is at least adequate to the level of risk borne. In particular, the Bank adheres to the following principles:

• It is necessary to avoid any credit risk level that would threaten the very existence of the Bank.

• Non-quantifiable residual credit risks are continually limited to an appropriate level by the continuous improvement of processes and systems and employee training.

• A sufficient capital volume is used to cover the credit risk.

• Credit criteria and the minimum requirement for the funding of counterparties are defined in such a way that it is possible to manage the quality of newly provided credit transactions in accordance with the Bank’s risk capacity.

The credit risk management process includes identifying risks, measuring risk exposure, monitoring limits and adopting measures to reach an optimal level of credit risk. The process takes place at the level of the individual

Data on the banking sector is taken from the indicator of the total capital ratio of banks according to the ARAD Database (http://www.cnb.cz/cnb/arad_zakl_ukazatele_bs)

12/1

0

3/11

6/11

9/11

12/1

1

3/12

6/12

9/12

12/1

2

3/13

6/13

9/13

12/1

3

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

9/16

12/1

6

3/17

6/17

9/17

12/1

7

8%

10%

12%

14%

16%

18%

20%

DEVELOPMENT OF CAPITAL ADEQUACY INDICATOR

Sberbank CZ

Capital share Tier 1

Banking sector


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counterparties of the client’s bank, as well as at the level of the credit portfolio.

In evaluating the credit quality of the client, the Bank focuses mainly on the analysis of the client’s financial and non-financial condition, the client’s ability to repay the loan provided from their cash flow, and experience with the client. The credit quality of each client is assessed, among other things, by using an internal rating tool corresponding to the type of client or the type of financing under assessment. Each client is classified into one of 26 grades on the internal rating scale. Each rating grade is assigned a fixed annual probability of default of the client, which is used as one of the parameters of the decision-making process. The rating tools are regularly tested and adjusted accordingly to ensure that the estimated probability of default of the client is correct.

Another criterion to be assessed when assessing a loan proposal is the quality of hedging instruments, while the Bank generally does not accept credit exposures the approval of which requires the accepted collateral. The catalogue of these instruments defines the acceptable types of collateral, the method used for determining their fair value, the frequency of revaluation and the responsibilities of each department of the bank.

The assessment and approval of loan proposals is independent of the business units. The approval powers are delegated by the Management Board and are divided into several levels. The Bank carries out regular monitoring of individual exposures in order to monitor the quality of the credit portfolio. This process increases the likelihood that future client defaults will be recognised early. In this case, the Bank has established a system for the timely settlement of problematic receivables, which reduces the probability of incurring losses through providing loans.

Regular evaluation of compliance with the set of limits is an integral part of credit risk management. The Bank sets limits for both the portfolio and individual transactions. Within the set of limits, both regulatory and internal limits are evaluated.

The Bank assesses receivables from clients in terms of a possible decline in their value, especially with regard to a rating downgrade, delays in repayment or any other breach of the original contractual terms by the counterparty.

The Bank assesses the impairment of receivables from two perspectives:

1. collective depreciation, which is applied to each group of assets on the basis of statistical models and is covered by collective loss provisions, and

2. individual impairments that are associated with individual loans for which there is objective evidence of impairment, which is covered by individual loss provisions.

In the area of the assessment of the impairment of receivables, the Bank implemented new procedures throughout 2017 defined by the new accounting standard IFRS 9 (International Financial Reporting Standard), which the Bank started to follow as of 1 January 2018.

12.4. Market RisksThe main instrument for market risk management is a system of limits for individual types of market risks. Compliance with these limits is monitored regularly. The Management Board, members of the Risk Committee and the relevant business units are to be informed immediately of any limit overrun and the related corrective measures taken. Limits are set internally by the parent company or the regulatory provisions of the CNB and are approved by the Risk Committee. Stress testing of market risks is run regularly.

The Bank manages the currency risk by closing its FX position through hedging transactions. The FX position in individual currencies is monitored daily and compared with the applicable limits.

The Bank quantifies the interest rate risk using monitoring tools that are based on contractual and behavioural re-fixing of the interest rate for individual assets, liabilities and off-balance sheet items of the Bank.

One of the fundamental tools is the daily gap report on the interest rate risk. It serves as a basis for simulations of the impact of interest rate shocks (standardised shocks, scenarios recommended by BCBS and other scenarios) on the economic value (NPV) of the balance. Other tools include the analysis of the impact of interest rate variations on the Bank’s net interest income (NII) and the analysis of the impact of assumptions and models on the Bank’s interest rate risk.

The results of these analyses are monitored and compared with the applicable limits. The Bank mitigates the interest rate position resulting from long-fixed assets by interest rate swaps.

From a regulatory standpoint, the Bank holds a small trading portfolio.


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12.5. Liquidity RiskOperational liquidity risk management is carried out daily by monitoring short-term and long-term liquidity indicators in the main individual currencies, as well as the aggregate for all currencies. On the basis of the development of these indicators, the Bank continually manages its liquidity position. The Bank distinguishes between the contractual maturity of the balance sheet items and the modelled expected maturity.

On a weekly basis, the Bank develops stress scenarios of its liquidity position based on data on the existing structure of assets and liabilities and their expected behaviour in model stress situations. A contingency plan has been prepared for the theoretical possibility of extraordinary circumstances threatening the bank’s liquidity.

Bank management is informed about the development of the bank’s liquidity and the measures taken through the Asset & Liability Committee.

12.6. Operational RiskIn accordance with regulatory requirements, the Bank has the necessary internal guidelines for operational risk management, including information security, business continuity, outsourcing and an internal control system that is set for the individual processes at all organisational levels.

The basic methods that are applied include the avoidance, reduction, transfer and acceptance of operational risk. The operational risk management process includes risk identification, recording, evaluation and assessment, including measures to minimise risk, and takes place at the level of actual events as well as hypothetical risks.

To manage and identify operational risk, the Bank uses the collection of operational risk events, their classification and subsequent evaluation, Risk Self-Assessment and scenario analysis for risks with a high impact on the Bank and a low frequency of occurrence.

On the basis of identified operational risks, the Bank takes measures aimed at effectively minimising the probability of the occurrence of similar events, and the measures are designed not only according to the frequency of occurrence and volume of the realised/projected financial impact but also with regard to the seriousness and cause.

The Bank has also drawn up contingency plans for critical situations and the restoration of operations to ensure business continuity to the fullest extent possible, and recovery plans for key IT applications.

12.7. Concentration RiskSufficient diversification of the underlying credit risk is ensured by a system of limits of concentration risk with respect to groups of connected clients, sectors in which clients operate, and countries. The Bank also sets a capital requirement for concentration risk within the Internal Capital Adequacy Assessment Process.

In the area of liquidity, the degree of concentration of client deposits is monitored, regularly compared with the applicable limits, and presented to the bank’s management.


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In accordance with Section 9 of the Articles of Association of Sberbank CZ, a.s., the bank’s internal structure system is dual. The bodies of the bank are the General Meeting, the Management Board, the Supervisory Board and the Audit Committee. Only private individuals may be members of the Management Board, the Supervisory Board and the Audit Committee. Members of the bodies are obliged to perform their duties with due professional care and diligence and to respect the prohibition of competition to the extent stipulated by law.

13.1. General MeetingThe General Meeting of Sberbank CZ, a.s., is the supreme body of Sberbank CZ, a.s.

Sberbank Europe AG is the sole holder of all shares of Sberbank CZ, a.s., and as the sole shareholder of Sberbank CZ, a.s., acts in the capacity of the General Meeting of Sberbank CZ, a.s. Decisions of the sole shareholder must be made in writing and, where required by law, in the form of notarial deeds. The sole shareholder has the right to require that the Management Board of Sberbank CZ, a.s., and the Supervisory Board of Sberbank CZ, a.s., take part in the decision-making process that occurs within the capacity of the General Meeting.

The powers of the General Meeting include in particular making decisions on the following:– amending the Articles of Association,– increase or decrease of registered capital,– issue of convertible or priority bonds,– appointing and dismissing members of the Supervisory

Board, approving performance agreements with members of the Supervisory Board and their amendments,

– appointing and dismissing members of the Audit Committee, approving performance agreements with members of the Audit Committee and their amendments,

– approving the annual financial statements and making decisions on the distribution of profits or the covering of losses,

– considering the report on the bank’s business activities and its assets,

– appointing an auditor to perform the statutory audit,– submitting applications for the admission of the

company’s shares for trading on the European regulated market or for the exclusion of shares from trading,

– transferring, leasing or pledging the enterprise, winding up the company with liquidation or transforming the company,

– changing the rights attached to individual classes or types of shares,

– restricting the transferability of registered shares,– excluding or limiting the pre-emptive right to acquire

convertible and priority bonds, and excluding or limiting the pre-emptive right to acquire new shares,

– increasing the registered capital with material non-cash contributions,

– changing the subject of enterprise,– approving the Supervisory Board’s Rules of Procedure,– approving the Audit Committee’s Rules of Procedure.

The General Meeting cannot reserve the right to make decisions on matters that have not been vested in the General Meeting by law or by the Articles of Association.

In 2017, the sole shareholder of Sberbank CZ, a.s., adopted in particular the following major decisions in the capacity of the General Meeting:– Decision of the sole shareholder acting in the

capacity of the General Meeting dated 23 February 2017

Through this decision, the sole shareholder appointed Hans Gerhard Randa as a member of the Supervisory Board.

– Decision of the sole shareholder acting in the capacity of the General Meeting dated 26 April 2017

Through this decision, the sole shareholder in particular considered and acknowledged the report on the bank’s business activities and its assets, acknowledged the Report on Relationships for 2016, approved the annual financial statements for 2016, decided on the Management Board’s proposal for the distribution of profit for 2016 and determined the external auditor for the year 2017.

– Decision of the sole shareholder acting in the capacity of the General Meeting dated 7 June 2017

Through this decision, the sole shareholder appointed Béla Czigony as a member of the Audit Committee effective 12 June 2017.

– Decision of the sole shareholder acting in the capacity of the General Meeting dated 8 June 2017

As a result of the expiration of Reinhard Kaufmann’s term of office in the Bank’s Supervisory Board, the sole shareholder re-appointed Reinhard Kaufmann as a member of the Supervisory Board for a new four-year term, effective from 14 June 2017.

– Decision of the sole shareholder acting in the capacity of the General Meeting dated 26 September 2017

Through this decision, the sole shareholder acknowledged the Semi-Annual Report of Sberbank CZ, a.s., for the year 2017.

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– Decision of the sole shareholder acting in the capacity of the General Meeting dated 13 October 2017

Through this decision, the sole shareholder appointed Stefan Karl Zapotocky as a member of the Supervisory Board Sberbank CZ, a.s.

13.2. Supervisory BoardThe Supervisory Board is a supervisory body that oversees the performance of the Management Board of Sberbank CZ, a.s., and the activities of the company. The Supervisory Board checks whether the Management Board performs its duties in accordance with the law and the Articles of Association, and whether members of the Management Board act in the interests of the company and with due professional care and diligence. Members of the Supervisory Board perform their duties with due professional care and diligence. No one is authorised to give to the Supervisory Board any instructions related to its statutory duty to oversee the activities of the Management Board.

The Supervisory Board consists of five members. Members of the Supervisory Board are elected and dismissed by the General Meeting for a four-year term of office. Members of the Supervisory Board elect the Chairman and Deputy chairman of the Supervisory Board from among their ranks. Neither the Management Board member nor the person authorised to act on behalf of Sberbank CZ may become a Supervisory Board member.

Members of the Supervisory Board of Sberbank CZ, a.s., are listed in the chapter entitled Governing Bodies (see p. 012).

Members of the Supervisory Board are liable to the company for any damage they cause due to a breach of their legal obligations. Members of the Supervisory Board are responsible to the company represented by the shareholder.

The Supervisory Board may set up committees with conferred decision-taken powers. Given by the size of Sberbank CZ, no such committees are set up by the Supervisory Board; the powers of such committees are executed by the Supervisory Board itself.

The Supervisory Board shall meet at least twice a year. Meetings of the Supervisory Board shall be convened by the Chairman or the Deputy chairman of the Supervisory Board or their representative. The Supervisory Board shall have a quorum if more than half of its members are present. Resolutions of the Supervisory Board shall be adopted by a simple majority. If the numbers of votes

are equal, the vote of the Chairman of the Supervisory Board (in the Chairman’s absence the vote of the Deputy chairman) shall decide. Minutes of every meeting shall be drawn up. The Supervisory Board may also adopt decisions outside of meetings in writing (per rollam decisions) or using technical means. Details are laid down in the Supervisory Board’s Rules of Procedure, approved by the General Meeting.

The responsibilities of the Supervisory Board include in particular:– reviewing the annual financial statements and

the proposal of the Management Board for the distribution of profit or covering of loss, and submitting its opinion to the General Meeting,

– informing the General Meeting of the results of the Supervisory Board’s supervisory activities,

– electing and dismissing members of the Management Board, approving performance agreements with members of the Management Board and their amendments,

– approving the Management Board’s Rules of Procedure,

– approving the allocation of organisational units among members of the Management Board within the company organisational chart,

– checking whether the management and control system is functional and effective, with an evaluation at least once a year,

– regularly discussing the strategic direction of the company,

– evaluating the activities of internal audit and compliance,

– expressing its opinion on proposals of the Management Board for the appointment of persons to the positions of risk management, compliance and internal audit, or their dismissal,

– determining the remuneration policy with respect to persons in positions of risk management, compliance and internal audit.

The Supervisory Board grants its consent to the Management Board for certain acts as set out in the Articles of Association of Sberbank CZ, a.s. Such acts include the establishment, relocation and closure of a branch and determining the company’s annual budget.

Meetings and per rollam decisions of the Supervisory BoardIn 2017, four regular meetings of the Supervisory Board were held, namely on 25 April 2017, 27 June 2017, 26 September 2017 and 5 December 2017, at which the Supervisory Board made decisions on matters that fell within its authority. In addition to the aforesaid meetings,


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the Supervisory Board adopted a number of other per rollam decisions.

Major per rollam decisions adopted by the Supervisory Board in 2017 include:– Written decision of the Supervisory Board dated

3 March 2017 The Supervisory Board decided to appoint Hans

Gerhard Randa as a Chairman of the Supervisory Board Sberbank CZ, a.s.

– Written decision of the Supervisory Board dated 3 March 2017

The Supervisory Board decided to approve the refurbishment of the branch Praha Lazarská.

– Written decision of the Supervisory Board dated 30 May 2017

The Supervisory Board performed an assessment in accordance with the Bank’s internal guidelines and subsequently decided on the credibility and professional competence of the nominated candidate, Stefan Karl Zapotocky, to perform the function of a member of the Bank’s Supervisory Board.

– Written decision of the Supervisory Board dated 17 July 2017

The Supervisory Board assessed in accordance with the Bank’s internal guidelines and subsequently decided on the credibility and professional competence of the nominated candidate, Dušan Baran, to perform the function of a member of the Bank’s Management Board.

– Written decision of the Supervisory Board dated 25 August 2017

The Supervisory Board decided to appoint Mr. Dušan Baran as a member of the Management Board Sberbank CZ, a.s., for 3 years with effect as of 1 September 2017. Dušan Baran is responsible for the Bank’s financial management.

13.3. Management BoardThe Management Board is the governing body of the company responsible for the business management of the company and representing the company in all matters. The Management Board is responsible for establishing, maintaining and evaluating the functional and efficient management and control system of the company as a whole and in parts. The Management Board exercises the rights of the employer. No one is authorised to give

to the Management Board instructions regarding the company’s business management, unless so required by law.

The Management Board consists of five members. Members of the Management Board are elected and dismissed by the Supervisory Board for a three-year term of office, unless the relevant performance agreement provides otherwise. Re-election is permissible. Members of the Management Board elect the Chairman of the Management Board from among their ranks. During the term of office, the Supervisory Board may dismiss the individual members of the Management Board.

Members of the Management Board of Sberbank CZ, a.s., are listed in the chapter entitled Governing Bodies (see p. 008).

Members of the Management Board shall perform their duties with due professional care and diligence, and act in good faith and in the best interests of the company and the shareholder. They are experts in managing large corporations with international experience and the capacity for teamwork. Their function requires continuous improvements in the field as well as in the area of corporate governance, a proactive approach to the fulfilment of obligations, the ability to contribute to the development of the corporate strategy and, last but not least, loyalty to the company. Members of the Management Board shall adhere to high ethical standards and ensure that the company complies with applicable laws. They are personally accountable for any damage they cause to the company due to a breach of legal obligations, and are responsible to the company represented by the Supervisory Board and the shareholder.

The Management Board may establish executive committees (for more information, see the subchapter entitled Committees Established by the Management Board on p. 035).

The Management Board shall meet according to the company’s needs, but at least once a month. Meetings of the Management Board shall be convened by the Chairman of the Management Board or the Chairman’s representative. The Management Board shall have a quorum if more than half of its members are present. Resolutions of the Management Board shall be adopted by a simple majority. In the case of equal numbers of votes, the Chairman of the Management Board shall have the deciding vote. The Management Board may also adopt decisions outside of meetings in writing (per rollam decisions) or using technical means. Details are laid down in the Management Board’s Rules of Procedure, approved by the Supervisory Board.


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The responsibilities of the Management Board include in particular:– approving and regularly assessing the overall company

strategy, the organisational structure of the company, the human resource management strategy, the risk management strategy, strategy related to capital and capital ratios, the strategy for the development of the information and communication system, the principles of the internal control system and the security policy,

– approving new products and other issues that are of fundamental importance or that have a potential significant impact on the company,

– approving the statutes of executive committees,– approving the strategic and periodic plan of internal

audit,– proposal of the persons charged with ensuring the

performance of the risk management function, the compliance function and the internal audit function or their dismissal to the Bank’s Supervisory Board,

– assessment of the credibility and suitability of individuals in key bank functions,

– deciding on actions outside the ordinary course of the company’s business,

– determination of the principles of human resources management, including the principles for the selection, remuneration, evaluation and motivation of employees,

– submits to the General Meeting for approval the regular, extraordinary and consolidated or, if relevant, interim financial statements and a proposal for profit distribution or loss settlement in accordance with the Bank’s Articles of Association,

– ensuring proper company bookkeeping.

Responsibilities of the individual members of the Management Board are divided according to fields (sections) in the organisational chart approved by the Supervisory Board. The functions of individual members of the Management Board are defined by the Bank’s internal guideline. Each member of the Management Board manages the section that has been assigned to that member and makes decisions on matters falling within the competence of that member’s section separately, unless the decision-making on the matter in question falls within the competence of the Management Board as a whole. The division of powers among the individual members of the Management Board shall be without prejudice to the overall responsibility of the members of the Bank’s Management Board. Members of the Management Board shall inform one another of any significant matters dealt with at the level of their respective sections and of those matters that may have an impact on other sections.

The Management Board regularly informs the Supervisory Board about the operation of the Bank and provides the Supervisory Board with the necessary materials and instruments. The Management Board is also obliged to inform the Supervisory Board about any events that may be of major importance to the Bank.

The Management Board decides on all company matters that are not reserved by law or the Articles of Association for the General Meeting, the Supervisory Board or the Audit Committee.

13.4. Committees Established by the Management BoardThe Management Board of Sberbank CZ, a.s. may establish executive committees in accordance with the Articles of Association of Sberbank CZ, a.s. and Decree No. 163/2014 Sb. on the performance of the activities of banks, credit unions and investment firms. In accordance with this authority, the Management Board of Sberbank CZ, a.s. has established the executive committees listed below and defined their authority, powers, composition and manner of conduct in the bylaws of the respective executive committees. Members of the executive committees are listed in the chapter entitled Governing Bodies (see p. 010).

In 2017, we started working on updating all the bylaws of the Executive Committee, which will be completed in the first half of 2018 and then submitted to the SBCZ Management Board for approval. The aim of the revision of the bylaws is to make them clear and simple and, if possible, unify the manner of negotiating and decision making across the Executive Committees of the Management Board.

Asset and Liability CommitteeThe Bylaws of the Assets and Liabilities Management Committee were approved by the Management Board of Sberbank CZ, a.s., on 9 May 2017 (in the current version).

The Asset & Liability Committee is an executive committee whose main task is to manage and evaluate the impacts of the evolution of interest rates, exchange rates, liquidity and financing options. It makes decisions on the rules for managing assets and liabilities, considers the current and prospective interest and currency risks in the investment portfolio, as well as liquidity risks, financing and management of the regulatory capital in order to optimise the revenue-risk profile.


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The Asset & Liability Committee shall meet at least once a month. Meetings of the Committee shall be convened by the secretary of the Committee (Head of OE 026 ALM/Treasury).

The Committee shall have a quorum if these conditions are fulfilled cumulatively:1) an absolute majority of the Committee’s voting

members is present in person, and 2) at least three members of the Management Board

are present in person, and3) the Chairman or Deputy chairman of the Committee

is present in person.

Resolutions of the Committee shall be adopted by a simple majority of votes of voting members of the Committee who are present. In the event of equal numbers of votes, the Chairman or the Deputy chairman of the Committee shall have the decisive vote. Each member of the Management Board is entitled to exercise his/her right of veto when voting on individual items on the agenda of the meeting. If the right of veto is exercised, the vetoed proposal is postponed until the next meeting of the Management Board to be discussed and decided upon. Minutes of every meeting of the Committee shall be drawn up. Under certain conditions, the Committee may adopt decisions outside of meetings in writing (per rollam decisions). Detailed information shall be set out in the Bylaws of the Asset & Liability Committee.

Credit CommitteeThe Bylaws of the Credit Committee were approved by the Management Board of Sberbank CZ, a.s., on 23 October 2017 effective 24 October 2017 (in the current version).

The Credit Committee is an executive committee that manages credit risk. It makes decisions on transactions that are associated with credit risks that go beyond and exceed the boundaries of the individual delegated authorities within Sberbank CZ, a.s.

The Credit Committee shall meet at least once a week. The Committee shall have a quorum if at least two members of the Management Board, the Chairman or Deputy chairman of the Committee (or their representative) and Head of OE 036 Underwriting Division (or their representative) are present. Meetings of the Committee shall be chaired by the member of the Management Board responsible for risk management (Chief Risk Officer). Resolutions of the Committee shall be adopted by a simple majority. In the case of equal numbers of votes, the Chairman of the Committee shall have the decisive vote. Minutes of every meeting of the

Committee shall be drawn up. Under certain conditions, the Committee may adopt decisions outside of meetings in writing (per rollam decisions). Detailed information shall be set out in the Bylaws of the Credit Committee.

Distressed Assets CommitteeThe Bylaws of the Distressed Assets Committee were approved by the Management Board of Sberbank CZ, a.s., on 7 November 2016 (in the current version).

The Distressed Assets Committee is an executive committee that manages and deals with non-performing loans provided by Sberbank CZ, a.s.

The Distressed Assets Committee shall meet at least once a week. Meetings of the Committee shall be convened by the secretary of the Committee (Head of OE 037 Workout & Restructuring). The Committee shall have a quorum if an absolute majority of the voting members, the member of the Management Board responsible for risk management (Chief Risk Officer) or Head of OE 037 Workout & Restructuring, and one of the following members of the Management Board (Chief Executive Officer or Chief Risk Officer or Chief Financial Officer) are present. Resolutions of the Committee shall be adopted by a simple majority. In the case of equal numbers of votes, the Chairman of the Committee shall have the decisive vote. The Chairman of the Committee (Chief Risk Officer) has the right of veto. Minutes of every meeting shall be drawn up. Under certain conditions, the Committee may adopt decisions outside of meetings in writing (per rollam decisions). Detailed information shall be set out in the Bylaws of the Distressed Assets Committee.

Retail CommitteeThe Bylaws of the Retail Committee were approved by the Management Board of Sberbank CZ, a.s., on 29 September 2015 effective 30 September 2015 (in the current version).

The Retail Committee is an executive committee in matters concerning the approval of non-credit products for retail clients of the bank and their changes and credit products for retail clients of the bank and their changes that do not require approval by the Risk Committee; the Retail Committee also supports the management of activities of the member of the Management Board of the bank responsible for Retail.

The Retail Committee shall meet at least once a week. Meetings of the Committee shall be convened by the secretary of the Committee (an employee of Sberbank


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CZ, a.s., authorised by the member of the Management Board responsible for Retail). The Committee shall have a quorum if an absolute majority of the voting members and the member of the Management Board responsible for Retail are present. Resolutions of the Committee shall be adopted by a simple majority. In the case of equal numbers of votes, the Chairman of the Committee (Chief Retail Officer) shall have the decisive vote. The Chairman of the Committee (Chief Retail Officer) has the right of veto. Minutes of every meeting shall be drawn up. Under certain conditions, the Committee may adopt decisions outside of meetings in writing (per rollam decisions). Detailed information shall be set out in the Bylaws of the Retail Committee.

Risk CommitteeThe Bylaws of the Risk Committee were approved by the Management Board of Sberbank CZ, a.s., on 27 June 2016 effective 1 July 2016 (in the current version).

The Risk Committee is an executive committee that is responsible for risk management at Sberbank CZ, a.s. In particular, it approves the rules of risk management, monitors credit, market and operational risks, and approves corrective measures.

The Risk Committee shall meet at least once a month. Meetings of the Committee shall be convened by the secretary of the Committee (Head of OE 070 Integrated Risk Management). The Committee shall have a quorum if an absolute majority of the voting members, the member of the Management Board responsible for risk management (Chief Risk Officer) or Head of OE 070 Integrated Risk Management and the member of the Management Board responsible for risk management (Chief Risk Officer) or the member of the Management Board responsible for financial management (Chief Financial Officer) are present. Resolutions of the Committee shall be adopted by a simple majority. The Chief Risk Officer, or in his/her absence the Chief Financial Officer, has the right of veto. Minutes of every meeting shall be drawn up. Under certain conditions, the Committee may adopt decisions outside of meetings in writing (per rollam decisions). Detailed information shall be set out in the Bylaws of the Risk Committee.

Project Portfolio CommitteeThe Bylaws of the Project Portfolio Committee were approved by the Management Board of Sberbank CZ, a.s., on 3 July 2017 (in the current version).

The Project Portfolio Committee is an executive committee that decides on issues related to the management of the Bank’s project portfolio. The Project

Portfolio Committee is responsible for the strategic management, approval and planning of projects within the Bank. Its core competencies include, in particular, prioritising projects, evaluating the economic benefits of projects, deciding on project implementation and approving the annual project plan.

The Project Portfolio Committee shall meet at least once a month. Meetings of the Committee shall be convened by the Secretary of the Audit Committee (or by Project Portfolio Manager). Resolutions of the Committee shall be adopted by a simple majority votes of members PPC present. In the case of equal numbers of votes, the Chairman of the Management Board shall have the decisive vote. Minutes of every meeting shall be drawn up. Under certain conditions, the Committee may adopt decisions outside of meetings in writing (per rollam decisions). Detailed information shall be set out in the Bylaws of the Project Portfolio Committee.

13.5. Audit CommitteeThe Audit Committee consists of three members. Members of the Audit Committee are appointed and dismissed by the General Meeting; they are appointed for the period until the end of the third General Meeting, which decides on the annual financial statements for the third calendar year, following their appointment; if the General Meeting is not held at the proper time, the term of office shall end on 30 June of the third calendar year following the appointment (the calendar year in which members of the Audit Committee were elected is not included in this period), unless the General Meeting decides otherwise. Members of the Audit Committee elect and dismiss the Chairman and Deputy chairman of the Audit Committee from among their ranks.

Members of the Audit Committee are listed in the chapter entitled Governing Bodies (see p. 014).

The Audit Committee shall meet at least twice a year. The Audit Committee shall have a quorum if more than half of its members are present. Resolutions of the Audit Committee shall be adopted by a simple majority. If the numbers of votes are equal, the vote of the Chairman of the Audit Committee (in the Chairman’s absence the vote of the Deputy chairman) shall be decisive. The Audit Committee may also adopt decisions outside of meetings in writing (per rollam decisions) or using technical means. Further information is laid down by the Rules of Procedure of the Audit Committee, approved by the General Meeting.


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The responsibilities of the Audit Committee include in particular:– monitoring the process of compiling the annual

financial statements,– evaluating the effectiveness of internal controls,

internal audit and risk management system,– monitoring the process of the statutory audit of the

annual financial statements,– assessing the independence of the statutory auditor,– approving the provision of other non-audit services,– recommending an auditor to the Supervisory Board,– providing the General Meeting with information

about the Audit Committee’s activities.

The Audit Committee performs other tasks vested in the Audit Committee by the Articles of Association or relevant legal regulations.

Meetings of the Audit Committee:In 2017, two regular meetings of the Audit Committee were held, namely on 25 April 2017 and 5 December 2017, at which the Audit Committee made decisions on matters that fell within its authority. In addition to the above-mentioned meetings, the Audit Committee adopted some decisions by letter. For example, the Audit Committee decided outside the meeting, i.e. by letter, to appoint Mr Reinhard Kaufmann the Deputy chairman of the Audit Committee.

13.6. Trustworthiness & Competence PolicyThe Bank shall ensure that members of its governing body, members of its Supervisory Board and any person in a key function of the Bank are trustworthy, sufficiently qualified and experienced. For this purpose, the Bank shall establish internal rules to assess and evaluate such persons. The Supervisory Board is one of the Bank’s bodies responsible for assessing the suitability and professional competence of the members of the Management Board and the Supervisory Board. The Management Board is a body assessing the suitability and professional competence of individuals in key functions.

MEMBERS OF THE BANK’S MANAGEMENT BOARDThe members of the Management Board must have sufficient knowledge, skills and experience to perform their functions. They are required to have basic theoretical banking knowledge that enables them to understand the Bank’s operation and major risks. The assessment criteria relate, in particular, to education, management experience, financial market experience,

knowledge in defined areas, criminal and administrative integrity, compliance with professional standards, an orderly financial situation, time availability and conflicts of interest.

When assessing the suitability of Management Board members, the suitability of the Management Board as a whole must be considered, too. The Management Board must have sufficient collective knowledge, skills and experience.

MEMBERS OF THE BANK’S SUPERVISORY BOARDThe members of the Supervisory Board must have sufficient knowledge, skills and experience to perform their functions. They are required to have basic theoretical banking knowledge that enables them to understand the Bank’s operation and major risks. The assessment criteria relate, in particular, to education, professional experience, basic knowledge in defined areas, criminal and administrative integrity, compliance with professional standards, an orderly financial situation, time availability and conflicts of interest. The Chairman of the Bank’s Supervisory Board is subject to increased demands with egard to the performance of his/her duties.

When assessing the suitability of Supervisory Board members, the suitability of the Supervisory Board as a whole must be considered. The Supervisory Board of the Bank must have sufficient collective knowledge, skills and experience.

PERSONS IN KEY FUNCTIONSPersons in key functions must have sufficient knowledge, skills and experience relevant to their jobs. The assessment is based on a comprehensive consideration of criteria. The assessment criteria include education and expert knowledge relevant to the respective tasks of persons in key functions. The criminal and administrative integrity and conflicts of interest of these persons are also assessed.

Members of the Management Board, members of the Supervisory Board and persons in a key function of the Bank must be competent not only at the beginning of the performance of their duties but permanently throughout the performance of their duties. For this purpose, regular training and courses are organised for these people.

The suitability of the person under consideration must be assessed before the person is selected/appointed or re-elected. Persons being assessed are obliged to fill in the forms and provide other documents and materials required for their evaluation. The body assessing the persons under consideration proceeds from the forms and documents received from the person being assessed


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for this purpose, and after evaluating them, it decides whether the person being assessed is credible and suitable. The body that elects/appoints the persons being assessed shall follow the result of the assessment.

Policies on the principles of credibility and professional competence shall not apply to senior management, unless they also hold key functions. When these persons are being recruited, however, similar criteria as for the persons in key functions are taken into account to ensure that only qualified and experienced people are hired. These persons are evaluated by HR Management in possible cooperation with a relevant member of the Management Board.

13.7. OECD Code of Corporate GovernanceSberbank CZ, a.s., voluntarily complies with the main standards of corporate governance laid down in the Code of Corporate Governance based on OECD Principles (2004), the Czech version of which is published on the website of the Ministry of Finance of the Czech Republic.

Sberbank CZ, a.s., respects the principles of corporate governance that best reflect the manner in which the company does business, the company’s interests and the company’s shareholder. These basic standards of corporate governance are reflected in the Articles of Association and related internal guidelines of the company. A number of recommendations arising from the aforesaid Code are also reflected in Act No. 90/2012 Coll. on business corporations, and other laws of the Czech Republic.

The company bodies and their powers are described in the chapter entitled Corporate Governance (see p. 032).

The main principles of corporate governance to which Sberbank CZ, a.s., adheres include in particular:– Protection of shareholders’ fundamental rights

(especially the right to the transfer of shares, the right to receive timely and regular information on the company from other company bodies, the right to elect and dismiss members of the Supervisory Board, the right to participate in the profits of the company, the right to participate in making decisions on significant changes in the company by amending the Articles of Association),

– Prohibition of abuse of insider information by members of the company bodies and employees (in particular the prohibition of using opportunities for personal gain, conflict of interest, competitive conduct and misusing the company’s assets; members of the company bodies are obliged to act with due professional care and diligence),

– Publishing (important information relating to the company and its activities is published on the website of Sberbank CZ, a.s., in Czech and possibly also in English),

– Transparency (especially the statutory auditor’s independence and its assessment by the Audit Committee, access to regular, reliable and sufficiently detailed information in the annual and semi-annual reports of the company, information on the ownership structure of the company, preparing the report on relationships, assessing the integrity and professional competence of members of the company bodies, report on the activities of the Management Board),

– Responsibilities of the Management Board and the Supervisory Board (in particular the obligation to act with due professional care and diligence, electing and dismissing members of the Supervisory Board by the General Meeting, electing and dismissing members of the Management Board by the Supervisory Board, submitting the report on the Management Board’s activities to the General Meeting, submitting the report on the Supervisory Board’s activities to the General Meeting, monitoring and resolving potential conflicts of interest).

In addition to the aforesaid Code, Sberbank CZ, a.s., voluntarily complies with the following codes that are published at www.czech-ba.cz and www.akatcr.cz:– Ethical Code of the Czech Banking Association, – Ethical Code of the Capital Market Association,– Code for Loans and Housing (CBA Standard No.

18/2005, the principles of provision of pre-contractual information related to housing loans),

– Bank-Client Code (CBA Standard No. 19/2005, the code of conduct between banks and clients),

– Code of Client Mobility (CBA Standard No. 22/2009, clients’ mobility - the process of changing banks),

– CBA standards in the payment system.

The codes and CBA standards are incorporated in the bank’s Code of Conduct of Employees and internal work procedures.


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13.8. Diversity PolicyAlthough Sberbank CZ, a.s. has not implemented a diversity policy as an internal document yet, it complies with the requirements for the diversity of members of the governing bodies. The diversity requirement is mentioned in the Sberbank CZ, a.s. internal guidelines on principles of credibility and professional competence.

In these internal guidelines, Sberbank CZ, a.s. considers, among other things, the personal characteristics of candidates for new members of the Management Board and the Supervisory Board when assessing and evaluating their credibility and professional competence. It also focuses on their education, professional knowledge and experience. It especially takes into account the fact that the composition of the body should be diverse and the body should be able to perform its duties at Sberbank CZ, a.s. properly, not only in accordance with regulatory requirements but also with requirements for the quality of personnel management. A greater diversity of the human factor in these bodies creates a more creative and innovative environment in which people are able to respond more flexibly to new challenges that today’s regulated world of banking brings in a large number. A Sberbank CZ, a.s. body, as a whole, must have sufficient collective knowledge, skills and experience to understand all the activities of the Bank, ranging from day-to-day operations, the main risks associated with the subject of the business and corporate governance to specific knowledge of the banking industry and its regulatory environment. Individual members are selected to complement each other, both in terms of their experience and the body’s capability to perform its functions.

The selection of such candidates for membership of the bodies is a demanding and regulated process, in which an assessment is performed of whether the candidate has sufficient experience and skills for the job and is the right person to fit in and thus creates, together with the other members, a competent and sufficiently diverse group of people which will, as a whole, be able to perform its function properly. When a candidate is being selected, great emphasis is put on the professional competence and experience of the individuals, taking into account their personality.

Since Sberbank CZ, a.s. is, on the basis of its size and the number of employees, a medium-sized company with a lower number of members in its bodies, a high level of diversity, as in large companies, is more difficult to achieve.

The Management Board of Sberbank CZ, a.s. consists of five members, the Supervisory Board of five members and the Audit Committee of three members. The legislation provides for special rules for the composition of the Audit

Committee so that the Committee is professionally competent to perform its function, and Sberbank CZ, a.s. follows the rules in the selection process to comply with the statutory requirement. The Management Board consists of men from 40 to 52 years of age with 13 to 22 years of experience in the banking sector and 11 to 19 years of management skills. They acquired their education either in the Czech Republic or abroad.

The Supervisory Board consists of four men and one woman aged between 32 and 73, with 11 to 55 years of experience in the banking sector and 9 to 32 years of management skills. The Supervisory Board is diverse in terms of geographical origin; there is one German, one Russian and three Austrians. The diversity of the Supervisory Board is greater than the diversity of the Management Board because it is easier to find a candidate for a control function without executive powers than a candidate for a function with executive powers, which is more demanding, especially in terms of responsibility for business management and decision making.

The company is aware of the importance of diversity principles and intends to focus on setting goals in this area in the upcoming years.

13.9. Internal ControlInternal control is a process whose participants are the Management Board, officers and all other employees, and which is designed to provide reasonable assurance regarding the achievement of objectives relating to:

• effectiveness and efficiency of operations,• reliability of financial reports,• compliance with applicable laws and regulations.

An effective internal control system provides reasonable (not absolute) assurance of security of property, reliability of financial information and compliance with laws and regulations. This concept of reasonable assurance lies in a constant evolution and implementation of internal controls and constitutes a tool of the bank’s Management Board to achieve an optimum balance between the risk of business processes and the level of controls necessary to ensure the achievement of the bank’s business objectives.

The methodology of the internal control system is based on the internal control principles as recommended by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. This approach provides Sberbank CZ, a.s., with a good-quality, clear, practical basis for its own internal control system.

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The Management Board provides for the setting of appropriate control principles, procedures and activities supporting the control objectives at all levels, and is responsible for maintaining the functionality and effectiveness of the internal control system.

In the management of key risks within the risk tolerance levels set by the bank’s Management Board, each head of an organisational unit identifies appropriate internal controls with respect to the “cost/benefit” indicator. In accordance with the identified risks, the relevant processes and associated risks are subject to checks (controls).

The competent officer prepares a plan of checks and controls that includes an overview of ongoing checks and controls in the unit for each organisational unit. For each check or control, it is stated how its execution is documented. All control activities, including related responsibilities, powers and internal guidelines, can be traced back.

As part of the internal control system, the bank has established the following types of controls:

• operational controls - routine controls of an everyday nature,

• periodic controls – controls with a minimum of a one-week execution interval,

• managerial controls/key control indicators – monitoring the execution of operational or periodic controls by the authorised person,

• extraordinary controls – control investigations – their aim is to discover the objective causes of any negative findings.

The established control mechanisms are periodically reviewed and updated as necessary.

The internal control system is continuously monitored and evaluated. Its functionality and effectiveness is regularly assessed by the Management Board and the Audit Committee. An internal audit independently reviews the bank’s activities, including the risk management system and the internal control system.

The process of accounting and financial reporting may be exposed to risks of inaccuracies resulting from human or technical factors. Sberbank CZ, a.s., attempts to minimise these risks in the following ways:

• prepared accounting principles, which are described in the notes to the annual financial statements,

• detailed methodological guidelines and operating procedures for all areas of accounting, which are used in everyday accounting practice,

• standard inventory process,• established internal controls for accounting,• efforts to automate bookkeeping to the greatest

possible extent.

Targetsin businessactivities

reporting andcompliance

Reportingon the functioningand effectiveness

of the internalcontrol system

5.

1.

Risk identificationand analysis

Identificationof appropriate

internal controls

Monitoringof internal

controls

2.

4. 3.

THE INTERNAL CONTROL PROCESSconsists of the following steps:

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14.1. Principles for Remuneration of Senior ManagementSenior managers at Sberbank CZ, a.s., are members of the Management Board and members of the Supervisory Board.

Members of the Management Board and the Supervisory Board of the company are listed in the chapter entitled Governing Bodies (see p. 008).

The Supervisory Board as a body with the power to elect and dismiss members of the Management Board approves performance agreements with the individual members of the Management Board; among other things, these agreements govern the method of remuneration of members, i.e. the amount of income.

The Supervisory Board has not established any committees, not even a remuneration committee.

The sole shareholder is a body with the power to elect and dismiss members of the Supervisory Board exercising the powers of the General Meeting. Members of the company’s Supervisory Board are not entitled to any remuneration or payment for the performance of their duties and thus perform the function for free.

The Chairman of the Management Board and members of the Management Board are remunerated on the basis of their respective Performance Agreements concluded with them in accordance with the relevant provisions of the Business Corporations Act. The Performance Agreement with each member of the Management Board has been approved by the Supervisory Board of the company. The company pays fixed monthly remuneration to the Chairman of the Management Board and members of the Management Board for their management activities and other activities related to the performance of their duties as members of the Management Board.

In 2016, Service Agreements were entered into with four members of the Management Board, namely Vladimír Šolc, Karel Soukeník, Jiří Antoš and Jindřich Horníček, as a result of the establishment/extension of their terms in office by the decision of the Supervisory Board. These Service Agreements have been approved by the Supervisory Board. They were concluded for their entire term of office, so they were also valid in 2017. Dušan Baran, who took on the function of a member of the Bank’s Management Board on 1 September 2017, and the Bank concluded a Service Agreement for his term of office, which was approved by the Bank’s Supervisory Board with effect from 1 September 2017.

The basic principles for remunerating members of the Management Board are regulated in the internal guideline entitled “Remuneration Policy”. This internal

guideline was amended in accordance with Czech and European law. It was approved by the Supervisory Board on 16 August 2017. The service agreements that are concluded reflect the principles for determining the remuneration of members of the Management Board governed by this internal guideline.

The remuneration of the members of the Management Board corresponds to their authority, tasks, expert knowledge and experience. The Chairman of the Management Board and members of the Management Board are remunerated with regard to the assessment of their performance, which is measured based on the fulfilment of the defined performance criteria. The performance criteria are established in cooperation with SBEU, are set for each calendar year, and are derived from the financial goals (profit of SBEU before tax, profit of Sberbank CZ, a.s., before tax and profit of the controlled organisational unit) and the fulfilment of structural duties. The variable remuneration component is up to 50% of the fixed component. The bonus is a variable remuneration component and is subject to regulatory requirements of the CNB and the European Banking Authority. The regulatory requirements including possible consequences are also set out in the Performance Agreements with the individual members of the Management Board.

The Supervisory Board approves the variable component of the remuneration of the members of the Management Board in accordance with the approved budget of the Bank.

Sberbank CZ, a.s., as an institution with an organisational structure of medium complexity, does not apply the payment of variable components in non-cash instruments.

The variable remuneration component is paid out within a three-year period. 60% of the variable remuneration component is paid out immediately, i.e. without delay, and the payment of the remaining 40% of the variable remuneration component is deferred for a period of three years. The entitlement to the variable remuneration component with deferred maturity is only awarded if to do so is sustainable from the point of view of the overall financial situation of the Bank. The remuneration with deferred maturity is gradually paid out in three payments, with the proviso that no more than one payment per year should be made. The adjustment of the “malus” institute (denial of the entitlement to the payment of the variable remuneration component) and the “clawback” institute (the recovery of remuneration already paid out) shall also apply to the members of the Management Board. The rules for the application of these institutes are laid down in detail in the Remuneration Policy.

In addition to the aforementioned monthly remuneration and annual bonuses, members of the Management Board are also entitled to:

• meal vouchers in the amount of CZK 90 (the employer pays 55%),

SBERBANK CZ | ANNUAL REPORT 2017REMUNERATION

14. REMUNERATION

043

• contribution to a supplementary pension of 300 CZK/month,

• five weeks of holiday,• payment of the difference between the gross monthly

income and sickness benefit in the event of incapacity for work of up to three months during one calendar year,

• if they do not require a company car, they are entitled to a car allowance,

• if a member of the Management Board is dismissed before the end of his/her term of office, the severance payment shall be 50% of his/her gross annual income.

The Chairman of the Management Board, members of the Management Board, members of the Supervisory Board or persons related to them do not hold shares or options to purchase shares of Sberbank CZ, a.s., for the reason that shares of Sberbank CZ, a.s., are not publicly traded.

There are no agreements of members of the Management Board with Sberbank CZ, a.s., that might be substantial and beneficial upon the termination of the legal relationship in terms of users of the annual report, except the aforesaid performance agreements.

14.2. Income of Senior ManagementSenior managers at Sberbank CZ, a.s., are members of the Management Board and members of the Supervisory Board.

1. Income of the Management BoardPerformance Agreements have been made with the individual members of the Management Board, under which members of the Management Board are remunerated. In accordance with their Service Agreements and the Remuneration Policy, the members

of the Management Board received the following incomes in 2017:

in millions of CZK 2017Fixed part of remuneration 30.628

Variable part of remuneration* 5.696

Total financial income 36.324

Income in kind** 0.766

* The variable part of remuneration consists of bonuses paid for the previous years

** The income in kind is the sum of additional taxation of 1% of the purchase value of the vehicle for the entire year and for all members of the Management Board

The above amounts represent the sum of the income received by the individual members of the Management Board for 2017.

The sum of all the unpaid variable components of the remuneration of the members of the Management Board with deferred maturity amounts to CZK 3,741,971.73.

The above amounts are based on the managerial skills, expertise and experience of the individual members of the Management Board and on the overall benefit to the company.

This income was paid based on meeting the financial, qualitative and development criteria and based on the efficiency criteria.

2. Income of the Supervisory BoardMembers of the Supervisory Board did not receive any monetary or non-monetary income for the performance of their duties in 2017.

SBERBANK CZ | ANNUAL REPORT 2017REMUNERATION

14.3. Fees Charged by Audit Companies for 2017

Company:

Annual accounts and

other audit services

Consulting services Tax services Oher TOTAL

Ernst & Young Audit, s.r.o. CZK 7,643,570 CZK 7,643,570

Ernst & Young, s.r.o. CZK 484,000 CZK 544,568 CZK 1,028,568

PricewaterhouseCoopers Audit, s.r.o. CZK 302,500 CZK 302,500PricewaterhouseCoopers Česká republika, s.r.o. CZK 1,215,501 CZK 1,215,501

Deloitte Advisory Sp z.o.o., Polsko CZK 3,159,412 CZK 3,159,412

Deloitte Advisory, s.r.o. CZK 5,903,705 CZK 5,903,705

KPMG Česká republika, s.r.o. CZK 520,000 CZK 520,000

TOTAL CZK 7,643,570 CZK 7,941,706 CZK 484,000 CZK 3,703,980 CZK 19,773,256

044

15.1. IntroductionIn 2014, Directive 2014/95/EU of the European Parliament and of the Council amending Directive 2013/34/EU concerning the disclosure of non-financial and diversity information by certain large undertakings and groups (the “EU Directive”) was adopted. This EU Directive was implemented in the Czech Accounting Act No. 563/1991 Sb. A new requirement has been established for large reporting entities that meet the criteria under Section 32f of Act No. 563/1991 Sb., on accounting, to process and publish a report on non-financial information, the first one to be prepared for 2017. The report may be processed as part of the company’s annual report or as a separate report. This report contains selected non-financial information related to the company, such as environmental awareness, social and employment issues, human rights, the fight against corruption and bribery, etc.

Pursuant to Section 32g (7) of Accounting Act No. 563/1991 Sb., Sberbank CZ, a.s. is exempted from the obligation to prepare a report on non-financial information. The reason for the exemption is the fact that Sberbank Europe AG prepares a report on non-financial information in accordance with the European legislation for the entire group, including Sberbank CZ, a.s. This consolidated report on non-financial information will be published at www.sberbank.at.

Our major pillars include the active involvement of our employees in the company’s volunteer programme, environmentally responsible behaviour of the Bank, support for landscape restoration and charity. We distribute funds from the Sberbank CZ Endowment Fund to non-profit companies for projects that aim at improving the lives of specific people and making them more enjoyable.

Volunteering by Sberbank CZ employeesFOREST PLANTINGLast year, Sberbank CZ organised three volunteer days in which 43 colleagues participated. They actively helped non-profit organisations; for example, they planted 700 silver fir trees in the Beskydy Mountains. As part of their volunteer activities, Sberbank CZ employees have already planted three forests – one in Podještědí and two in the Beskydy Mountains. Almost 400 employees have been involved in the Volunteering project since its launch in 2012. The Bank pays one day’s full salary a year to help the needy.

Christmas Gifts to the NeedyDuring the sixth year of the Dárky pro potřebné (Gifts for the Needy) event, our employees fulfilled Christmas wishes. Altogether, they brought joy to 113 children and seniors from five reception centres and nursing homes who were surprised to find gifts from the Bank under their Christmas tree.

We cooperated with the following social facilities: Reception Centre for Mothers and Children – “PRO” Centre Boskovice, Nursing Home Kamenná – Brno, Centre for Mothers and Children Hodonín, Nursing Home – St. Vavřinec Home in Liberec, Centre for Mothers and Children in Distress Domažlice.

The clients of these facilities had previously created lists of their Christmas wishes, which were delivered to our employees. Our employees then divided the gift wishes among themselves and bought and wrapped the gifts, and the Department of Communications sent them to the above-mentioned facilities. The wishes that were fulfilled included toys, cosmetics, clothes, household supplies, small electronic items and books. Sberbank CZ, a.s. employees from the whole country joined the popular initiative.

Promotion of cancer preventionIn November, Sberbank CZ, a.s. participated actively in the global campaign for the prevention of prostate and testicular cancer – the Movember Project. During the month, we organised several events to promote awareness. The Sberbank CZ employees contributed a record amount to Movember. They managed to collect over CZK 174,000 and became the third most successful team donor in the Czech Republic. The previous year’s collection was thus exceeded by CZK 57,000.

15. SOCIAL RESPONSIBILITY

SBERBANK CZ | ANNUAL REPORT 2017SOCIAL RESPONSIBILITY

045

A team of Sberbank CZ employees headed by a member of the Management Board, Jiří Antoš, strove to collect as much as possible. Almost all the employees of the Bank were actively involved in Movember. Among other things, they baked moustached biscuits for sale for charities. All the Sberbank CZ branches were effectively involved in the campaign. At some of them, public workshops called “Mysli na sebe včas” (Think of Yourself in Time) addressed the early detection of breast and testicular cancer.

The money that was collected was donated to the “Muži proti rakovině” endowment fund for the prevention and treatment of prostate and testicular cancer. In the previous year, an operating room at the Faculty Hospital in Plzeň was equipped thanks to the donations that were collected.

Promoting a Barrier-Free EnvironmentMore than three-quarters of our branches have been gradually transformed into barrier-free offices. Sberbank CZ wants to continue in these activities and plans to create barrier-free access to all its branches and administrative buildings in Prague and Brno and thus become a barrier-free bank.

15.2. Sberbank CZ Endowment FundWe provide funds for charitable activities through the Sberbank CZ Endowment Fund, which was established in 2012 as a charitable fund and later transformed into a separate legal entity in March 2014. We support only non-profit organisations registered in the Czech Republic (in particular foundations, endowment funds, associations, community organisations and churches), on the condition that the resources are used solely for purposes that are consistent with the Fund’s charitable goals and mission as set out in the Memorandum of Association of the Fund;

the areas that are supported include in particular the following:

• vulnerable children and supporting the activities of children living in socially substandard conditions,

• vulnerable women and supporting programmes for women living in socially substandard conditions,

• promoting education and financial literacy,• disability,• seniors,• environmental projects.

In 2017, the Administrative Board of the Endowment Fund decided to support the following 11 projects (including Movember) with the total amount of CZK 316,371.

• CZK 10,000 for a playground, Domov pro seniory Kamenec, Slezská Ostrava, p.o. (nursing home for seniors)

• CZK 10,000 for musical instruments for music therapy, Jasněnka, z.s.

• CZK 10,000 for transportation and starting fees for handicapped swimmers participating in races, Andělé Stromu života pobočný spolek Moravskoslezský kraj

• CZK 10,000 for a bathtub for patients of the mobile hospice SK KONTAKT BRNO z.s.

• CZK 46,000 for a tandem bicycle for Barborka, Nadace prof. Vejdovského

• CZK 35,000 for the purchase of trees that were planted in the Beskydy Mountains by the employees of Sberbank CZ, ČSOP Salamandr

• CZK 40,000 for accommodation and meals for children from children’s homes from regions on Sports Day, Federace dětských domovů ČR

• CZK 12,000 for transport and entrance fees for disabled and socially disadvantaged children participating in the summer camp, ČLOVÍČEK (One Little)

• CZK 72,900 to support the Movember project• CZK 28,000 for a child’s wheelchair for Denisek,

Hašle z.s.• CZK 42,471 for a special rehabilitation table for the

Vojta exercise method for little Matěj, Hašle z.s.


046

15.3. Environmental ProtectionSberbank CZ is committed to environmental protection and landscape restoration. We were the first bank to begin to measure and reduce our carbon footprint under the SLEDUJEME/SNIŽUJEME CO2 (WE MONITOR/REDUCE CO2 EMISSIONS) programme. In 2016, the carbon footprint of the entire Bank dropped by 13.6%, which is attested by the “Calculation of the Company’s Carbon Footprint” certificate obtained from the guarantor, CI2, o.p.s. in 2017.

Despite the increasing number of clients and employees, the Bank managed to reduce its greenhouse gas emissions by 259 tons of CO2 in the last year, which is equivalent to the emissions of 155 cars driving 10,000km per year. The same amount of CO2 is absorbed by 280 fir trees in 60 years of their life. Sberbank CZ also became the second best GEEN Bank of 2016 for its environmentally friendly business environment. When the placings in the competition are being decided on, energy efficiency is one of the important criteria and the Bank keeps looking for energy-saving potentials.

Business TripsIn 2014, Sberbank CZ successfully launched the internal application CarShare, which supports car sharing.

When planning a company car trip, the ride is entered in a special application on the intranet. Any colleague who is going the same way can join the ride. This system of travelling reduced the average fuel consumption per employee in the years 2014–2017.

The Bank also actively promoted environmentally responsible behaviour through a project called “Do práce na kole” (To Work on a Bike), under which 37 employees rode 7,102 kilometres.

15.4. Respecting Human Rights In carrying out banking activities, we do not forget the fundamental human rights and moral values on which civilised society is based. Sberbank CZ, a.s., is aware of its social responsibility and fully respects fundamental human rights and freedoms. The company identifies with the current positive trends and recognises that the right to have a payment account, among other things, is one of the basic rights of modern society.

Sberbank CZ, a.s., always acts to avoid and prevent the financing of terrorism and other business transactions with entities that grossly violate human rights.

15.5. Fight Against Corruption and BriberySberbank CZ, a.s., fully recognises values and attitudes expressing zero tolerance of all forms of direct or indirect bribery or corruption. As a member of the Czech Banking Association, the bank consistently adheres to the Ethical Code of the Czech Banking Association, which is one of the cornerstones of conduct of member banks, expressing, among other things, the requirement for a transparent approach and execution of banking activities in the financial market.

Being aware of the seriousness and meaning of corruption, the bank has established and further elaborated specific measures that effectively prevent corruption or abuse of power by its employees. These rules of conduct are mandatory for all employees of Sberbank CZ, a.s., and are observed without exception in other relationships to which the company is a party.

15.6. Social and Employment IssuesSberbank CZ, a.s. supports its employees in the area of mental and physical health, and that is why we especially promoted the following areas in the field of employee benefits and employee care in the past year:– In 2017, we focused on better management of holiday

time, and we make sure that our employees plan their days off and draw them to the greatest extent possible.

– In order to support the balance between the work and private lives of its employees, the Bank provides employees with five paid personal days off in addition to the regular five weeks of leave.

– The Bank actively promotes volunteerism; employees can register for charitable work and an absence of a length of one day is paid.

– Last year, the Bank organised workshops and events to promote the health of its employees, e.g. the prevention of breast cancer and the like.

– In order to strengthen team spirit, the Bank continued supporting sports, cultural and social activities.

– It also expanded the number of discounts to employees on the products and services of our partners and other third parties.

– Finally, the Bank allows its employees to work from home when working conditions so permit.


047

16. ADDITIONAL INFORMATION

16.1. SharesThe company’s shares are ordinary registered shares, are numbered, if so provided by law, and are issued as dematerialised securities. Dematerialised shares are registered with the Central Securities Depository Prague (Centrální depozitář cenných papírů, a.s.).

The company has issued 561,198 dematerialised registered shares with a par value of CZK 5,000 per share. The total volume of the issue is CZK 2,805,990,000.

The registered capital that has been paid up in full amounts to CZK 2,805,990,000.

The holder of all the above shares is the sole shareholder, Sberbank Europe AG, with its registered office at Schwarzenbergplatz 3, 1010 Vienna, Republic of Austria.

The shares are freely transferable. The shares are not traded on the regulated European market.

Sberbank CZ, a.s., has not issued any convertible bonds which carry the right to their exchange for shares or any priority bonds which carry the right to a preferential subscription for shares.

There are no programmes on the basis of which employees and members of the Management Board may acquire shares in the company, options on such shares or other rights to them under preferential conditions.

During 2017, Sberbank CZ, a.s., did not hold any own shares or any shares of the controlling entity.

No members of senior management hold any shares constituting an ownership interest in Sberbank CZ, a.s.

No rating has been assigned to the shares of Sberbank CZ, a.s.

Basic rights and obligations of shareholders:

The basic rights and obligations of shareholders are governed by the Articles of Association and Act No. 90/2012 Coll. on business corporations.

All the shares carry the same rights and obligations.

Each shareholder has the right to participate in the management of the company through the General Meeting and the right to participate in the profits of the company approved for distribution.

Shareholders shall exercise their rights and fulfil their obligations assigned to them under the Articles of Association and applicable laws at the General Meeting or outside it. Each shareholder is entitled to attend the General Meeting, to vote, to request and receive explanations of matters relating to the company or entities controlled by the company, and to raise objections and submit counterproposals. The voting rights attached to shares are not limited. The voting right of each shareholder is associated with the respective share. Each share with a par value of CZK 5,000 represents one vote. The total number of votes in the company is 561,198.

16.2. Mortgage BondsThe aggregate liabilities under all mortgage bonds in circulation issued by a single issuer must be fully covered by claims or parts thereof under mortgage loans (ordinary cover) or by an alternative method (alternative cover). Only claims under mortgage loans or parts thereof not exceeding 70% of the pledge value of the pledged real property securing these claims may be used for the ordinary cover of the aggregate liabilities under all mortgage bonds in circulation. Sberbank CZ, a.s. has not yet used any alternative cover.

As of 31 December 2017 the volume of loans serving as cover declined by 25% on a year-on-year basis in covering the issued mortgage bonds with mortgage loans, from CZK 8.916 billion as of 31 December 2016 to CZK 6.622 billion as of 31 December 2017. Bond liabilities (principal and accrued coupon) in the amount of CZK 1.9 billion are covered by mortgage loans concluded before 31 December 2017 at the rate of more than 350%. The pledge value of real property securing these loans is CZK 15.374 billion, which covers more than eight times the bank’s liabilities under the bonds issued. The Bank is obliged to check claims, revaluate real property regularly and monitor compliance of the pledges with the Land Register. The cover sufficiency is monitored by the Bank daily and is checked regularly by the CNB.

All completed issues of MB of Sberbank CZ, a.s. were duly repaid at maturity.

The Bank may register new issues of MB on the Prague Stock Exchange.

No rating has been assigned to Sberbank CZ, a.s. or to any mortgage bonds issued by it.

SBERBANK CZ | ANNUAL REPORT 2017ADDITIONAL INFORMATION

048

ISIN bonds: CZ0002003254 and CZ0002003460 were issued on the basis of the Bond Programme 2010 of Sberbank CZ, a.s., the base prospectus of which was approved by the decision of the Czech National Bank, Ref. No. 2013/10785/570, dated 27 September 2013, effective on the same date.

Bond ISIN: CZ0002002454 was issued on the basis of the Bond Programme of Volksbank CZ, a.s., the base prospectus of which was approved by the decision of the Czech National Bank dated 22 February 2010, Ref. No. 2010/1613/570 to file No. Sp/2010/28/572, with effect as of the following day.

Issue of mortgage bonds of Sberbank CZ, a.s. for the year ending on 31 December 2017:

MORTGAGE BONDS VB CZ 5.30% MATURING IN 2017• Identification code (ISIN): CZ0002001688• Issue date; form: 18 December 2007; in bearer form,

dematerialised• Total issue volume: CZK 0.8 billion• Nominal value; quantity: CZK 10,000; 80,000• Coupons: fixed annual interest rate of 5.30% payable

annually in arrears• Mortgage bonds traded on: ---• Mortgage bond maturity: The mortgage bonds were

redeemed at their nominal value on 18 December 2017

MORTGAGE BONDS VB CZ VAR MATURING IN 2017• Identification code (ISIN): CZ0002002454• Issue date; form: 22 March 2012; in bearer form,

dematerialised• Total issue volume: CZK 0.5 billion• Nominal value; quantity: CZK 1; 500,000,000• Coupons: floating semi-annual interest rate of 6M

PRIBOR + 2% payable semi-annually in arrears• Mortgage bonds traded on: Prague Stock Exchange• Mortgage bond maturity: The mortgage bonds were

redeemed at their nominal value on 22 March 2017

MORTGAGE BONDS VB CZ 2.30% MATURING IN 2018• Identification code (ISIN): CZ0002003254• Issue date; form: 24 October 2013; in bearer form,

dematerialised• Total issue volume: CZK 1 billion• Nominal value; quantity: CZK 10,000; 100,000• Coupons: fixed annual interest rate of 2.30% payable

annually in arrears• Mortgage bonds traded on: Prague Stock Exchange• Mortgage bond maturity: The mortgage bonds will

be redeemed at their nominal value on 24 October 2018

MORTGAGE BONDS VB CZ 2.00% MATURING IN 2020• Identification code (ISIN): CZ0002003460• Issue date; form: 26 June 2014; in bearer form,

dematerialised• Total issue volume: CZK 1.3 billion• Nominal value; quantity: CZK 10,000; 130,000• Coupons: fixed annual interest rate of 2.00% payable

annually in arrears• Mortgage bonds traded on: Prague Stock Exchange• Mortgage bond maturity: The mortgage bonds will

be redeemed at their nominal value on 26 June 2020

In 2017, the Bank published the method for calculating the mortgage bond market price (https://www.sberbankcz.cz/obcane/investovani/hypotecni-zastavni-listy – under “Appendices” and “Mortgage Bond Calculation”) in accordance with the provisions on enhanced client protection under Directive 2004/39/EC of the European Union on markets in financial instruments (The Market in Financial Instruments Directive) – MiFID.

Detailed information on the issue of the mortgage bonds of Sberbank CZ, a.s. is available at www.sberbankcz.czspecifically at https://www.sberbankcz.cz/obcane/investovani/hypotecni-zastavni-listy

16.3. Judicial ProceedingsPassive litigation:

In 2015, the company paid CZK 129.4 million to Mgr. Daniel Schaffer in damages on the basis of the final decision of the court of second instance. The company strongly disagrees with this court decision and has filed an extraordinary appeal against it with the Supreme Court of the Czech Republic. The appellate proceedings are still pending.

At the end of 2017, no litigation against the company with a presumed significant impact on the company’s position had been initiated.

Debt collection:

At the end of 2017, the company had in particular the following claims against its clients:

– Claim in the amount of CZK 312,968,455.04 registered in insolvency proceedings against a client of the company (PO)

SBERBANK CZ | ANNUAL REPORT 2017ADDITIONAL INFORMATION

049SBERBANK CZ | ANNUAL REPORT 2017ADDITIONAL INFORMATION

– Claim in the amount of CZK 99,950,173.94 registered in distress proceedings against a client of the company (PO)







– Claim in the amount of CZK 17,469,133.81 registered in distress proceedings against a client of the company (PO)



The list of the above active and passive litigation is not exhaustive and includes only major litigation.

16.4. Major ContractsExcept contracts made under regular business conditions, no major contracts have been made to which Sberbank CZ, a.s., is a party and which might result in a liability or claim of any member of the Group affecting the company’s ability to fulfil its obligations to holders of securities (bonds) based on the issued securities (bonds).

16.5. Research, Science and DevelopmentIn 2017, the bank invested CZK 114 589 000 in activities in research and development (in 2016: CZK 82,160,000). These are mainly internal costs associated with the implementation of projects in the development of information technology. The largest share in these costs is attributable to projects designed to improve multi-channel banking, improve the support of the issuance of payment cards, including transaction processing, and improve the data warehouse.

16.6. Conflict of InterestSberbank CZ, a.s., declares that it is not aware of any potential conflict of interest between the obligations of members of the Management Board, including members of senior management and members of the Supervisory Board to the company, and their private interests or other duties.

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17. ALTERNATIVE PERFORMANCE INDICATORS

In order to provide a more qualified presentation of financial results and financial performance, the bank presents users with annual reports and additional, alternative indicators of financial performance. These are indicators that are derived from the basic indicators described and presented in the financial statements and the notes thereon, to which they can be reconciled, or additional data needs to be stated if they are not presented elsewhere in the financial statements or in the annual report.

The bank has decided to use the following alternative performance indicators to present the financial results and financial performance.

Total amounts owed to clients

An indicator that represents the total liabilities from deposits received and securities issued. It constitutes the total resources which the bank received from non-financial entities.

The indicator is the sum of selected positions of the passive party to the statement of financial position (balance sheet) of the bank presented in the financial statements:

in millions CZK 2017 2016

Total amounts owed to clients: 66,043 59,049

– Amounts owed to clients 64,129 55,787

– Liabilities from debt securities issued 1,914 3,262

Profit from financial operations before the creation of reserves and loss provisions

This indicator represents the total amount of proceeds the bank has achieved in its main business, including in particular the acceptance of deposits and the provision of loans.

The indicator is the sum of the selected positions of the bank’s statement of comprehensive income presented in the financial statements:


Profit from financial operations before the creation of reserves and loss provisions: 2,228 2,028

– Net interest income 1,646 1,539

– Net income from fees and commissions 408 365

– Net trading income 174 99

– Net income from financial investments 0 25

Share of non-performing loans (NPL)

This indicator represents the ratio of the volume of non-performing loans to total loans. Non-performing loans are non-standard, doubtful and irrecoverable claims defined in the bank’s financial statements in Chapter 33(b). It is one of the indicators of the risk level in the Bank’s credit portfolio, which is often used to compare banks.

The indicator is the ratio of the selected positions of the bank’s statement of comprehensive income presented in the financial statements:

in millions CZK 2017 2016Share of non-performing loans (NPL): 5.43% 5.74%

– Loans and advances individually impaired 3,350 3,257

– Loans and advances to clients – gross 61,678 56,755

Return on Average Assets (ROAA)

This indicator represents the average rate of return on the Bank’s assets. It is calculated as the quotient of the “Net Profit for the Accounting Period” and average “Total Assets” for the relevant accounting period. “Net Profit for the Accounting Period” is presented in the “Statement of Comprehensive Income”. The average “Total Assets” is calculated as the arithmetic mean of the “Total Assets” status values at the end of each month in the relevant accounting period

SBERBANK CZ | ANNUAL REPORT 2017ALTERNATIVE PERFORMANCE INDICATORS

051

in millions of CZK or % p.a. 2017 2016Net Profit for the Accounting Period: 424 272

Average Assets for the Accounting Period: 78,214 73,875

Return on Average Assets (ROAA): 0.54% 0.37%

Return On Average Tier 1 Equity (ROAE)

This indicator represents the average rate of return on the Bank’s Tier 1 equity. It is calculated as the quotient of the “Net Profit for the Accounting Period” and average “Tier 1 Equity” for the relevant accounting period. “Net Profit for the Accounting Period” is presented in the “Statement of Comprehensive Income”. The average “Tier 1 Equity” is calculated as the arithmetic mean of the “Tier 1 Equity” status values at the end of each month in the relevant accounting period.

in millions of CZK or % p.a. 2017 2016Net Profit for the Accounting Period: 424 272

Average Tier 1 equity for the accounting period: 7,984 7,838

Return On Average Tier 1 Equity (ROAE): 5.31% 3.47%

Assets Per Employee

This indicator represents the total volume of the Bank’s property (assets) reported in the Bank’s Statement of Financial Standing (balance sheet) presented in the financial statements per employee. The number of employees is the recalculated average registered number of employees.


Asset volume: 81,464 71,965

Number of employees 914 840

Assets Per Employee 89.129 85.673

Administrative expenses per employee

This indicator represents the total volume of the Bank’s administrative expenses reported in the Bank’s Statement of Comprehensive Income presented in the financial statements per employee. The number of employees is the recalculated average registered number of employees.


Administrative expenses: 1,454 1,398

Number of employees: 914 840

Administrative expenses per employee 1.591 1.664

Net Profit per Employee

This indicator represents the total net profit for the accounting period reported in the Bank’s Statement of Comprehensive Income presented in the financial statements per employee. The number of employees is the recalculated average registered number of employees.


Net profit: 424 272

Number of employees: 914 840

Net Profit per Employee 0.464 0.324

SBERBANK CZ | ANNUAL REPORT 2017ALTERNATIVE PERFORMANCE INDICATORS

SBERBANK CZ | ANNUAL REPORT 2017FINANCIAL STATEMENTS052

SBERBANK CZ, a.s.

INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS (Prepared in accordance with International Financial Reporting Standards as adopted by the European Union)

FOR THE YEAR ENDED 31 DECEMBER 2017

FINANCIALSTATEMENTS

SBERBANK CZ | ANNUAL REPORT 2017STATEMENT OF COMPREHENSIVE INCOME 053

in CZK million Note

Year ended 31 December

2017 2016

Interest and similar income 1,909 1,920

Interest expense and similar charges (263) (381)

Net interest income 3 1,646 1,539

Fee and commission income 559 505

Fee and commission expense (151) (140)

Net fee and commission income 4 408 365

Net trading income 5 174 99

Net income from financial investments 6 0 25

Impairment charge for credit losses (215) (214)

Provisions (4) (26)

Administrative expenses 7 (1,454) (1,398)

Other operating income 8 42 47

Other operating expenses 9 (66) (101)

Operating profit 531 336

Profit before income tax 531 336

Income tax expense 10 (107) (64)

Profit for the year 424 272

Other comprehensive income

Items that will never be reclassified to profit or loss

Remeasurements of defined benefit lability 28 0 0

Items that are or may be reclassified to profit or loss

Fair value reserves (available-for-sale financial assets) 28 0 (21)

Other comprehensive income for the period, net of income tax 0 (21)

Total comprehensive income 424 251

Profit attributable to:

– Owners of the Bank 424 272

Profit for the period 424 272

Total comprehensive income attributable to:

– Owners of the Bank 424 251

Total comprehensive income 424 251

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2017Prepared in accordance with International Financial Reporting Standards as adopted by the European Union

SBERBANK CZ | ANNUAL REPORT 2017STATEMENT OF FINANCIAL POSITION054

in CZK million Note

As at 31 December

2017 2016

ASSETS

Cash and balances with central banks 11 17,439 12,975

Loans and advances to banks 12 1,892 1, 955

Loans and advances to customers 13,14 60,483 55,613

Changes in the fair value of the portfolio of hedged instruments (70) 0

Derivative financial instruments 15 192 113

Derivative financial instruments to hedge interest rate risk 15 57 0

Investment securities – loans and receivables 17 245 245

Intangible assets 18 477 268

Property and equipment 19 263 282

Deferred income tax assets 20 81 88

Other assets 21 341 376

Deferred items 21 64 50

Total assets 81,464 71,965

LIABILITIES

Deposits from banks 22 5,387 3,467

Due to customers 23 64,129 55,787



Debt securities in issue 24 1,914 3,262

Current income tax liabilities 47 28

Other liabilities 25 808 765


Provisions 26 39 91

Subordinated debt 27 179 189

Total liabilities 72,710 63,635

EQUITY

Share capital 28 2,806 2,806

Share premium account 4,015 4,015

Reserve 166 152

Retained earnings 1,767 1,357

Total equity 8,754 8,330

Total equity and liabilities 81,464 71,965

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017Prepared in accordance with International Financial Reporting Standards as adopted by the European Union

SBERBANK CZ | ANNUAL REPORT 2017STATEMENT OF CHANGES IN EQUITY 055

in CZK millionShare

capital

Share premium

account Reserves

Cumulative gains not

recognized in the profit

for the period – AFS

Retained earnings

Total Equity

As at 1 January 2016 2,806 4,015 151 21 1,086 8,079Remeasurements of defined benefit liability (asset) - - - - - -

Net change in available-for-sale investments, net of tax - - - (21) - (21)

Other comprehensive income (recognized directly in equity) - - - (21) - (21)

Net profit - - - - 272 272

Total comprehensive income for 2016 - - - (21) 272 251

Dividends relating to 2015 - - - - - -

Issue of shares - - - - - -

Transfer to reserves - - 1 - (1) -

As at 31 December 2016 2,806 4,015 152 - 1,357 8,330

As at 1 January 2017 2,806 4,015 152 - 1,357 8,330Remeasurements of defined benefit liability (asset) - - - - - -

Net change in available-for-sale investments, net of tax - - - - - -

Other comprehensive income (recognized directly in equity) - - - - - -

Net profit - - - - 424 424

Total comprehensive income for 2017 - - - - 424 424

Dividends relating to 2016 - - - - - -

Issue of shares - - - - - -

Transfer to reserves - - 14 - (14) -

As at 31 December 2017 2,806 4,015 166 - 1,767 8,754

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017Prepared in accordance with International Financial Reporting Standards as adopted by the European Union

SBERBANK CZ | ANNUAL REPORT 2017STATEMENT OF CASH FLOW056

in CZK million Note 2017Restated

2016

Cash flow from / (used in) operating activities


Adjustment for:

Impairment losses on loans and advances 14 215 214

Provisions 26 (52) 32

Depreciation of property and equipment 7 109 106

(Increase) / decrease in operating assets:

Due from banks, non-demand, over 3 months 74 702

Financial assets at fair value through profit or loss (136) (46)

Loans and advances (5,085) (3,938)

Changes in the fair value of the portfolio of hedged instruments 70 0

Other assets 35 (87)

Prepayments and accrued income (14) (12)

Increase / (decrease) in operating liabilities

Due to banks, term (887) (3,042)

Financial liabilities at fair value through profit and loss 157 20

Due to customers 8,342 19

Promissory notes and certificates of deposits 24 7 (1,034)

Other liabilities 43 356

Accruals and deferred income 4 14

Net cash flow from / (used in) operating activities before income tax 3,413 (6,360)

Net income tax (81) 18

Net cash flow from (used in) operating activities 3,332 (6,342)

STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 2017Prepared in accordance with International Financial Reporting Standards as adopted by the European Union

SBERBANK CZ | ANNUAL REPORT 2017STATEMENT OF CASH FLOW 057

in CZK million Note 2017Restated

2016

Cash flow from / (used in) investing activities

Purchase of investment securities 17 0 (92)

Proceeds from sale and redemption of available for sale securities 17 0 1,303

Purchase of property, equipment and intangible assets 18,19 (299) (254)

Sale of property, equipment and intangible assets 0 1

Impairment losses on fixed assets 0 19

Net cash flow from / (used in) investing activities (299) 977

Cash flow from / (used in) financing activities

Repayment of mortgage bonds 24 (1,337) (1,438)

Other changes in mortgage bonds 24 (18) (35)

Draw of subordinated liabilities 27 0 189

Other changes in Repayment of subordinated liabilities 27 (10) 0

Net cash flow from financing activities (1,365) (1,284)

Net increase / (decrease) in cash and cash equivalents 1,668 (6,649)

Cash and cash equivalents at the beginning of the year 31 12,472 19,121Impact of the changes in the foreign exchange rates on cash and cash equivalents (39) 20

Net increase / (decrease) in cash and cash equivalents 1,707 (6,669)

Cash and cash equivalents at the end of the year 31 14,140 12,472

Operational cash flow from interest

Interest paid 263 381

Interest received 1,909 1,920

These financial statements were approved for issue by the Management Board on 5 April 2018 and signed on its behalf by:

Signature of the statutory representatives Person responsible Person responsible for accounting for the preparation of the financial statements

Dušan Baran Jindřich Horníček Alena Sládková Libor NosekMember of the Member of theManagement Board Management Board

The accompanying notes are an integral part of these financial statements.

SBERBANK CZ | ANNUAL REPORT 2017NOTES TO THE FINANCIAL STATEMENTS058

1 General InformationSberbank CZ, a.s. (hereinafter referred to as “the Bank”) was incorporated on 31 October 1996. The Bank had 28 domestic regional branches in the Czech Republic as at 31 December 2017 (as at 31 December 2016: 28 branches) and employed on average 924 people (as at 31 December 2016: 851 people).

As at 31 December 2017 and 31 December 2016, the ultimate holding company was Sberbank, which is incorporated in Russia and whose registered office is located at 117997 Moscow, 19 Vavilova St. (hereinafter referred to as “Sberbank RU”). The financial statements of the Bank were included in the consolidated financial statements of Sberbank RU. The direct holding company was Sberbank Europe AG (hereinafter referred to as “Sberbank EU”), which is incorporated in Austria.

The Bank’s operations primarily consist of the following:• Providing Czech and foreign currency loans and guarantees• Accepting and placing deposits in Czech and foreign currencies• Accepting current and term accounts denominated in Czech and foreign currencies • Rendering of general banking services through a network of branches and agencies• Providing foreign exchange transactions on the inter-bank money market• Providing foreign trade finance and related banking services• Trading in securities and portfolio management

• Issuing mortgage bonds

2 Accounting Policies(a) Statement of compliance and basis of preparation of financial statements

The statutory financial statements, comprising the statement of financial position, statement of comprehensive income and statement of changes in equity, a statement of the cash flow and accompanying notes, of the Bank have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“EU IFRS”). The policies set out below have been consistently applied to all the reporting periods presented.

The financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities held at fair value through profit or loss and all derivative contracts.

The preparation of financial statements to comply with EU IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies.

The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2 (ab).

The financial statements are rounded to millions of Czech Crowns (“CZK million” or “CZKm”) unless otherwise stated.

NOTES TO THE FINANCIAL STATEMENTS

SBERBANK CZ | ANNUAL REPORT 2017NOTES TO THE FINANCIAL STATEMENTS 059

(b) Operating segments reporting

The Bank determines and presents operating segments based on the information which is internally presented to the Management Board as the Bank’s main operating decision making body with regard to resources to be allocated to the segment and to assess its performance.

The operating segment is a component of the Bank:

• That engages in business activities from which revenues and expenses may arise (including revenues and expenses related to transactions with other components of the Bank)

• Whose operating results are regularly reviewed by the Bank’s Management Board to make decisions about resources to be allocated to the segment and to assess its performance

• For which discrete financial information is available

(c) Foreign currencies translation

FUNCTIONAL AND PRESENTATION CURRENCYItems included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates (“the functional currency”).

The financial statements are presented in CZK, which is the Bank’s functional and presentation currency.

TRANSACTIONS AND BALANCESForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in “net trading income”.

Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of net trading income. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the other comprehensive income in the fair value reserve in equity.

(d) Financial assets and liabilities and their valuation

The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets.

The Bank classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss and other financial liabilities. The classification of financial assets and liabilities is based on management’s intention at initial recognition and the relevant criteria for classification have to be met.

(I) FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS The category of financial assets and liabilities at fair value through profit or loss has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception.

A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments which are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated as hedging instruments.


Financial assets and financial liabilities are designated at initial recognition at fair value through profit or loss when:

• Doing so significantly reduces measurement inconsistencies that would arise if the related derivatives were treated as held for trading and the underlying financial instruments were carried at amortized cost for loans and advances to customers or banks and debt securities in issue

• The group of financial assets and financial liabilities, such as debt securities, are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel, and on that basis are designated at fair value through profit and loss

• Financial instruments, such as debt securities held, containing one or more embedded derivatives significantly modifying the cash flows, are designated at fair value through profit and loss.

Gains and losses arising from the sale and changes in the fair value of financial instruments held for trading, including trading derivatives that are managed in conjunction with designated financial assets or financial liabilities, are recorded in “net trading income”.

Gains and losses arising from the sale and changes in the fair value of financial assets and financial liabilities designated at fair value through profit or loss at inception are recorded in “net income from financial investments”.

(II) LOANS AND RECEIVABLESLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the Bank intends to sell immediately or in the short term, which are classified as held for trading, and those that the Bank upon initial recognition designates as fair value through profit or loss; (b) those that the Bank upon initial recognition designates as available for sale; or (c) those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration. These assets are carried at amortized cost.

(III) HELD-TO-MATURITY FINANCIAL ASSETSHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that are quoted in an active market which the Bank’s management has the positive intention and ability to hold to maturity. These assets are carried at amortized cost. If the Bank has sold other than an insignificant amount of held-to-maturity assets before maturity (other than in certain specific circumstances), the entire category has to be reclassified as available for sale. Furthermore, the Bank would be prohibited from classifying any financial assets as held-to-maturity during the following two years.

(IV) AVAILABLE-FOR-SALE FINANCIAL ASSETSAvailable-for-sale investments are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. These assets are carried at fair value.

(V) FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS For financial liabilities, the classification and rules referred to in paragraph (i) are applied.

(VI) OTHER FINANCIAL LIABILITIESThe Bank classifies all financial liabilities in this category, except for those classified in the category of financial liabilities at fair value through profit or loss in accordance with those rules for classification in that category. Other financial liabilities are carried at amortized cost.

The Bank issues mortgage bonds. Re-purchased mortgage bonds directly decrease the liabilities from issued securities.


(VII) RECOGNITION AND DERECOGNITION OF FINANCIAL ASSETSRegular-way purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized on the trade date – the date on which the Bank commits to purchasing or selling the asset.

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are recognized in the statement of comprehensive income under “fee and commission expense”. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or when the Bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when they are extinguished − that is, when the obligation is discharged, cancelled or expires.

Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of “financial assets at fair value through profit or loss” are included in the profit for the period in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized directly in equity, until the financial asset is derecognized or impaired. At this time, the cumulative gain or loss previously recognized in equity is recognized in profit or loss.

However, interest calculated using the effective interest method and foreign currency gains and losses on monetary assets classified as available for sale are recognized in the profit for the period. Dividends on available-for-sale equity instruments are recognized in the profit for the period when the Bank’s right to receive payment is established.

(VIII) DETERMINATION OF FAIR VALUEFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurable date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date.

The fair values of quoted investments in active markets are based on current bid prices. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no active market for a financial asset, the Bank establishes the fair value using valuation techniques that maximize the use of relevant observable inputs. These include for example the use of a discounted cash flow analysis and other valuation techniques commonly used by market participants.

The Bank’s accounting methods on fair value are disclosed in Note 34.

(e) Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

(f) Derivative financial instruments and hedge accounting

Derivatives including foreign exchange contracts, currency and interest rate swaps are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Sources for fair value measurement of the derivatives are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and option pricing models, as appropriate. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

The methodology for credit value adjustment (“CVA”) and debit value adjustments (“DVA”) for derivatives is based on Sberbank Europe group methodology. The basic principle of the CVA and DVA calculation is to estimate the expected loss during the lifetime of the derivative.


The Bank occasionally purchases or issues financial instruments containing embedded derivatives. Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognized in the profit for the period unless the Bank chooses to designate the hybrid contracts at fair value through profit or loss.

The Bank has prepared a methodology for hedge accounting for interest rate risk management. This methodology is applied when hedging the risk decided by the responsible unit of the Bank. On initial designation of the hedge, the Bank formally documents the relationship between the hedging instrument and hedged item, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Bank makes an assessment, both at inception and on an ongoing basis, of whether the hedging instrument is expected to be highly effective in offsetting the changes in the fair value due to the change of interest rates of the respective hedged item during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80 – 125%.

For interest risk management of certain assets or liabilities, the Bank designates the fair value hedge relationship. The objective of such a hedge relationship is to protect the Bank from the effect of the fair value fluctuation of the hedged asset or liability which affects the profit and loss. Changes in the fair value of the hedging derivative are recognized immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk, in the same line item in the comprehensive income. Related interest income / expense from the hedging instrument is recorded in Net interest income, revaluation of the hedging instrument is recognized in Net trading income. The change in fair value of the hedged item attributable to the risk hedged measured at amortised cost is recorded on a separate line Changes in the fair value of the portfolio of hedged instruments. The change in fair value of the hedged item and is also recognised in the statement of income in Net trading income.

If the derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. For fair value hedges relating to items carried at amortised cost, any adjustment to the carrying value is amortised through the statement of income over the remaining term of the hedge using the effective interest rate method. Amortisation begins as soon as an adjustment exists but no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the statement of income.

The Bank designates certain derivatives as hedging instruments in a fair value hedge when the responsible organizational unit of the Bank decides to hedge such risk. The Bank does not apply a cash flow hedge or net investment hedge accounting as risks that can be covered with this type of hedge accounting are not important for the Bank.

(g) Recognition of deferred day one profit and loss

The best evidence of fair value at initial recognition is the transaction price (i.e. the fair value of the consideration given or received), unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique for which the variables include only data from observable markets.

When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a Day 1 profit or loss) in Net trading income. In cases where the fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the income statement when the inputs become observable, or when the instrument is derecognized.


(h) Interest income and expense

Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading, are recognized in the statement of comprehensive income under “interest and similar income” and “interest expense and similar charges” using the effective interest method.

Interest income and expense for interest-bearing financial instruments classified as held for trading, are recognized in the statement of comprehensive income under “net trading income”.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The effective interest rate is established when the financial asset or liability is first recognized and it is revised at the time of the change of the estimated future cash flows arising from the financial instruments with floating interest rate or with non-fixed payments.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

(i) Fee and commission income and fee expense

Fees and commissions are generally recognized on an accrual basis when the service has been provided. Loan commitment fees for loans which are likely to be drawn down are deferred (together with related direct costs) and recognized as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognized as revenue when the syndication has been completed and the Bank has retained no part of the loan package as own participation. Commissions and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognized on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a time-apportioned basis. Asset management fees related to investment funds are recognized evenly over the period in which the service is provided. The same principle is applied for asset management, financial planning and custody services which are continuously provided over an extended period of time. Performance linked fees or fee components are recognized when the performance criteria are fulfilled.

(j) Dividend income

Dividends are recognized in the profit for the period when the Bank’s right to receive payment is established.

(k) Sale and repurchase agreements

Securities sold subject to repurchase agreements (“repos”) are reclassified in the statement of financial position as assets. The counterparty liability is included in “deposits from banks” or “due to customers”, as appropriate. Securities purchased under agreements to resell (“reverse repos”) are recorded as “loans and advances to banks” or “loans and advances to customers”, as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.


(l) Impairment of financial assets

(I) LOANS AND RECEIVABLES CARRIED AT AMORTIZED COSTSThe Bank assesses as at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the Bank mainly uses to determine that there is objective evidence of an impairment loss include the following:

• Delinquency in contractual payments of principal or interest

• Cash flow difficulties experienced by the borrower

• Breach of loan covenants or conditions

• Initiation of bankruptcy or insolvency proceedings

• Deterioration of the borrower’s competitive position

• Deterioration in the value of collateral

• Downgrading below investment grade level

The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods used vary between three and six months.

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the profit for the period. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract and under current market conditions.

As a practical expedient, the Bank may measure impairment on the basis of an instrument’s fair value using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtor̀ s ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank.


Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period in which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed either directly or by adjusting the allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal is recognized in the profit for the period in “impairment charge for credit losses”.

When a loan is uncollectible, it is written off against the related allowance for impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. These procedures mainly include: (i) cession of a loan (if the debt is ceded at a lower price than the face value); (ii) report from the executor that there is no other property of the debtor that may be punished by execution of the loan; and (iii) the final termination of the insolvency proceedings with the debtor.

In the statement of comprehensive income under “impairment charge for credit losses” proceeds from written-off receivables are also reported.

(II) ASSETS CLASSIFIED AS AVAILABLE FOR SALEThe Bank assesses as at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the statement of comprehensive income. Impairment losses recognized in the profit for the period on equity instruments are not reversed through the statement of comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the profit for the period.

(III) ASSETS CLASSIFIED AS HELD TO MATURITYBonds classified as held to maturity are regularly tested for impairment. If the Bank concludes that there is objective evidence that a bond is impaired, it is reflected in an allowance account and the impairment loss is recognized in profit or loss. If an event occurring after the impairment was recognized causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through profit or loss.

(IV) RESTRUCTURED AND FORBORNE LOANS AND ADVANCESFrom the date of renegotiation, such loans are treated as individually impaired for a period of six months. If a loan performs according to the forbearance schedule, it becomes treated as a watched loan during the subsequent 18 months, and as standard starting the third year from the renegotiation (according to the CNB methodology described in the Note 33 (b)). The impairment of forborne receivables is measured using the original effective interest rate. Management continuously reviews the performance of the agreed conditions of forborne loans and the probability of future installments.


The Bank measures loans and advances with forbearance status. The Bank identifies all contracts with clients where contractual conditions were modified in order to relief existing financial difficulties or in cases where a client might get into financial difficulties if such relieve was not granted. Loans and advances with forbearance status can be designated loans and advances in the non-defaulted portfolio and also in portfolio with default. In accordance with regulatory requirements, the Bank regularly evaluates all exposures in the portfolio - on-balance and off-balance exposures in terms of forbearance. Testing is performed at the level of individual loans (contract).

(m) Intangible assets

The amortization of intangible assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

• Software – definite period under the contract, or according to the estimated useful life, or 36 months (if there is no agreement for a definite period or estimation of useful life)

• Audiovisual work – 18 months

• Other – 72 months

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring the specific software to use. These costs are amortized on the basis of the expected useful lives.

Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Bank, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include software development employee costs and an appropriate portion of relevant overheads.

Computer software development costs recognized as assets are amortized using the straight-line method over their useful lives.

The cost of depreciation of intangible assets is recognized in the statement of comprehensive income under “Administrative expenses”.

(n) Property, premises and equipment

Land and buildings comprise mainly branches and offices. All property, premises and equipment are stated at historical cost less depreciation. Historical costs of property, premises and equipment and intangible assets include:

• The cost (expenditures that are directly attributable to the acquisition of the items)

• Directly attributable costs necessary to bring the asset into operation

• The estimated costs of dismantling and removing the asset and restoring the place where the property is located

• Borrowing costs incurred for the period of the preparation of the asset for its intended use or sale. The Bank is currently buying property only from its own financial resources.

Tangible and intangible assets with acquisition costs up to CZK 10,000, furniture and hardware up to CZK 2,000, are expensed as acquired.

Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to “other general administrative expenses” during the financial period in which they are incurred.


Land, assets under construction and works of art are not depreciated. Depreciation on other long-term assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows (in years):

Buildings and construction (including Administrative buildings) 30Hardware and equipment 4Fixtures and fitting 6Safes 12

Motor vehicles 4

The leasehold improvements are depreciated over the term of the lease.

When classifying new assets into depreciation groups, the Bank uses the component approach, i.e. the major components of assets with different useful lives are depreciated separately.

The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, as at each statement of financial position date.

The cost of depreciation of property, premises and equipment are recognized in the statement of comprehensive income under “Administrative expenses”. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in “other operating income” or “other operating expenses” in the profit for the period.

The Bank does not hold any assets for which it would use the revaluation model. All property under paragraphs (m) and (n) is depreciated using the cost model. The Bank currently does not own the building, to which IAS 40 Investment property would be applied, i.e. property held primarily to earn rental income or for capital appreciation.

(o) Impairment of non-financial assets

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indicators of impairment can be external (decrease in market prices) or internal (information obtained from a review of useful lives and residual book values) carried out once a year. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that have suffered impairment are reviewed for the possible reversal of the impairment at each reporting date.

(p) Leases

The determination of whether an arrangement is a lease, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

The leases entered into by the Bank are primarily operating leases. The total payments made under operating leases are charged to “other general administrative expenses” in the profit for the period on a straight-line basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of a penalty is recognized as an expense in the period in which the termination takes place.

The Bank currently does not provide finance or operating leasing.


(q) Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 3 months maturity from the date of acquisition including: cash and balances with central banks (including Mandatory Minimum Reserves), due from banks and due to banks.

(r) Provisions

Provisions for legal claims, restructuring, financial guarantees issued, promises of loans issued, letters of credit issued and other contingent liabilities are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as interest expense.

(s) Financial guarantee contracts

The Bank gives financial guarantees, i.e. guarantees and letters of credit. Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities.

Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Bank’s obligations from issued guarantees are measured at the higher of the initial measurement, less amortization of revenue from fees amortized on straight basis in “income from fees and commissions” for the duration of the guarantee and the best estimate of expenses which will be required to settle any financial obligation that existed at the statement of financial position date. They are recognized as “provisions”. These estimates are determined based on experience with similar transactions and the history of past losses, supplemented by the judgment of management.

Any change in the amount of “provisions“ is recognized in ”impairment charge for credit losses“ in the statement of comprehensive income.

(t) Staff costs

Staff costs are included in “administrative expenses” and they also include remuneration of the members of the Management and Supervisory Board.

EMPLOYEE BENEFITSThe Bank does not provide any employee benefits that are the subject of creating and valuing reserves using actuarial methods in accordance with standard IAS 19 Employee benefits.

PENSIONS The Bank currently contributes to a defined contribution plan for its employees. A defined contribution plan is a pension plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

For defined contribution plans, the Bank pays contributions to privately administered pension insurance plans on a contractual or voluntary basis. The Bank has no further payment obligations once the contributions have been paid. The contributions are recognized as an employee benefit expense when they are due.


SOCIAL FUNDThe Bank creates a social fund to finance the social needs of its employees and employee benefit programs. The allocation to the social fund is recognized in the “administrative expenses”.

(u) Taxation and deferred income tax

INCOME TAXIncome tax payable on profits, based on Czech tax law, is recognized as an expense in the period in which profits arise.

DEFERRED TAXDeferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled.

The principal temporary differences arise from the depreciation of property, plant and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions and tax losses carried forward. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognized where it is probable that future taxable profit will be available against which the temporary differences can be utilized.

The tax effects of income tax losses available for carry-forward are recognized as an asset when it is probable that future taxable profits will be available against which these losses can be utilized.

Deferred tax related to the fair value re-measurement of available-for-sale investments, which is charged or credited directly to equity, is also credited or charged directly to equity and subsequently recognized in the profit for the period together with the deferred gain or loss.

(v) Value added tax

The Bank is registered for value added tax (“VAT”). Intangible and tangible fixed assets are stated at acquisition cost including the appropriate VAT. The Bank does not claim a reduced deduction of input VAT as the ratio of the taxable income to the total income of the Bank is such that it is not economical for the Bank to claim the input VAT.

(w) Borrowings

Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds net of transaction costs and the redemption value is recognized in the profit for the period over the period of the borrowings using the effective interest method.

(x) Share capital and reserves

SHARE ISSUE COSTSIncremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

DIVIDENDS ON SHARESDividends on shares are recognized in equity in the period in which they are approved by the Bank’s shareholders.

Dividends for the year that are declared after the balance sheet date are dealt with in the subsequent events note.


RESERVEIn accordance with the Articles of Incorporation, the Bank is required to set aside a reserve in equity.

The reserve represents accumulated transfers from retained earnings. A minimum of 5% of net profit should be allocated annually to the reserve until the amount of a minimum of 20% of share capital is achieved. This reserve is not distributable and can be used exclusively to cover losses.

(y) Fiduciary activities

The Bank acts as a trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, and other institutions. These assets and income arising thereof are excluded from these financial statements, as they do not belong to the Bank.

(z) Collateral valuation

The fair value of the collateral is determined using market data, valuation models and independent expert estimations. The dominant type of collateral is residential and non-residential property, where an expert estimation of the market value is conservatively reduced by a factor for the type of collateral. The amounts of reduction factor are based on conservative expert estimations, until the frequency of the realization of collaterals does not allow the determination of these factors on the basis of statistically significant observations. The reported financial effect of collateral is limited up to the carrying amount of the related financial asset.

(aa) IFRS /IAS accounting and reporting developments

A) The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Bank as of 1 January 2017:

• IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses (amendments)The amendments become effective for annual periods beginning on or after 1 January 2017. The objective of the amendments was to clarify the requirements of deferred tax assets for unrealized losses in order to address diversity in practice in the application of IAS 12 Income Taxes. The specific issues where diversity in practice existed relate to the existence of a deductible temporary difference upon a decrease in fair value, to recovering an asset for more than its carrying amount, to probable future taxable profit and to combine versus separate assessment. These amendments have been endorsed by the EU. These amendments did not have a significant impact on the Bank’s financial statements.

• IAS 7: Disclosure Initiative (amendments)The amendments are effective for annual periods beginning on or after 1 January 2017. The objective of the amendments was to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. These amendments have been endorsed by the EU. The Bank adjusted its cash flow statement to comply with the new requirements.

• Annual Improvements to IFRSs 2014–2016 Cycle, which is a collection of amendments to IFRSs. The amendments to IFRS 12 Disclosure of Interests in Other Entities are effective for annuals periods beginning on or after 1 January 2017. The amendments clarify that the disclosure requirements in IFRS 12, other than those of summarized financial information for subsidiaries, joint ventures and associates, apply to an entity’s interest in a subsidiary, a joint venture or an associate that is classified as held for sale, as held for distribution, or as discontinued operations in accordance with IFRS 5. These amendments had no significant impact on the Bank’s financial statements.


B) Standards issued but not yet effective and not early adopted.

• IFRS 9 Financial Instruments: Classification and MeasurementThe standard is effective for annual periods beginning on or after 1 January 2018. The final version of IFRS 9 Financial Instruments reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. This standard will have a significant impact on the Bank’s financial statements.

Classification and measurementThe Bank will classify all financial assets according to business model and characteristics of future contractual cash-flows from such assets. Existing categories according to standard IAS 39 will be replaced by below mentioned new categories according to IFRS 9:

• financial assets measured at amortized cost,

• financial assets measured at fair-value through profit and loss

• financial assets measured at fair-value through other comprehensive income

Measurement of financial liabilities will not change significantly in comparison with the existing standard IAS 39.

The Bank’s business model will be to hold financial assets to collect future contractual cash-flows for the vast majority of financial assets including the loan portfolio. The business model based on holding financial assets to collect future contractual cash-flows with possibility to sell will be applied on an ad hoc basis e.g. for syndicated loans, where the intention to sell these loans (fully or partly) exists since the initial recognition of these assets.

If the financial asset fails to pass the mandatory so called SPPI test (future contractual cash-flows are not solely payment of principal and interest), it will have to be measured at fair-value through profit and loss. This might be caused by special, individual arrangements in some corporate banking loan agreements. The Bank did not identify any contracts failing to pass the SPPI test as at 31 December 2017. The Bank expects that most of its bank’s loan portfolio continues to be classified as financial assets measured at amortized cost based on its business model and results of the SPPI test.

ImpairmentMethodology of financial assets impairment changes significantly according to the new standard IFRS 9. New principles for impairment will be applied not only to debt instruments measured at amortized cost or at fair-value through other comprehensive income but also to lease receivables, trade receivables, contractual assets, promises of loans issued and financial guarantees issued, which are not measured at fair value. Loan loss provisions calculation will be based on estimation of future expected credit losses. The standard requires to use weighted average probabilities in different scenarios and incorporation of forward looking information including macroeconomic factors (e.g. unemployment rate, GDP growth, future interest rates).

The Bank classify financial assets into three categories:

• “Stage 1” – category to which financial assets are assigned at initial recognition and are not impaired. Loan loss provision is based on expected credit losses within next 12 months (i.e. lifetime credit losses resulting from the default events within next 12 months)

• “Stage 2” – financial assets with significant increase in credit risk are assigned into this category. Loan loss provision is based on future lifetime expected credit losses

• “Stage 3” – category to which defaulted assets are assigned. It is based on the difference between carrying amount and the value of individual discounted expected future cash-flows

The Bank developed models for the calculation of parameters necessary for the loan loss provisions calculation (probability of default, exposure at default, loss given default etc.) especially for categories “Stage 1” and “Stage 2” in the cooperation with its parent company. Models will be regularly reviewed to provide relevant input parameters for the loan loss provision calculation.


Based on the results of the loan loss provision calculation the Bank will require additional provisioning. The output of the calculation of the IFRS 9 loan loss provisions and its impact on the Bank’s equity is summarized in the following table:

(CZKm)Exposure

as at 31.12.2017Provisions

as at 31.12.2017Provisions

as at 1.1.2018

Impact reported in the equity as at 1.1.2018

Loan loss provisions

Stage 1 51,964 165 399 234

Stage 2 8,859 123 423 300

Stage 3 2,451 907 900 (7)

63,274 1,195 1,722 527

Provisions for financial guarantees and other contingent liabilities

Stage 1 7,436 0 24 24

Stage 2 353 0 7 7

Stage 3 46 29 23 (6)

7,835 29 54 25

Deferred tax asset - (61) (167) (106)

Total loan loss provisions and provisions for financial guarantees and other contingent liabilities net of deferred tax - 1,163 1,609 446

Equity - 8,754 8,308 (446)

Additional loan loss provisions are required for loans and advances in the Stage 1 and Stage 2 categories. Loan loss provisions for Stage 3 loans and advances will be slightly lower.

• IFRS 15: Revenue from Contracts with CustomersThe standard is effective for annual periods beginning on or after 1 January 2018. IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non- financial assets that are not an output of the entity’s ordinary activities (e.g. sales of property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations; changes in contract asset and liability account balances between periods and key judgments and estimates. This standard is not expected to have a significant impact on the Bank’s financial statements.

• IFRS 15: Revenue from Contracts with Customers (clarifications)The clarifications apply for annual periods beginning on or after 1 January 2018 with earlier application permitted. The objective of the clarifications is to clarify the IASB’s intentions when developing the requirements in IFRS 15 Revenue from Contracts with Customers, particularly the accounting of identifying performance obligations amending the wording of the “separately identifiable” principle, of principal versus agent considerations including the assessment of whether an entity is a principal or an agent as well as applications of control principle and of licensing providing additional guidance for accounting of intellectual property and royalties. The clarifications also provide additional practical expedients for entities that either apply IFRS 15 fully retrospectively or that elect to apply the modified retrospective approach. These clarifications are not expected to have a significant impact on the Bank’s financial statements.


• IFRS 16: LeasesThe standard is effective for annual periods beginning on or after 1 January 2019. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). The new standard requires lessees to recognize most leases on their financial statements. Lessees will have a single accounting model for all leases, with certain exemptions. Lessor accounting is substantially unchanged. The standard has not been yet endorsed by the EU. The Bank will be influenced by this standard. According to this standard a new approach will have to be applied mainly for lease contracts for premises where the Bank offers banking services. This will significantly increase the volume of fixed assets in the statement of financial position and long-term liabilities from these contracts.

• IFRS 17: Insurance contractsThis standard is effective for annual periods beginning on or after 1 January 2021. It establishes principles for the recognition, measurement, presentation and disclosure of insurance and reinsurance contracts, life and non-life. This standard has not yet been endorsed by the EU. This standard is not expected to have a significant impact on the Bank’s financial statements.

• Amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (amendments)The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. The amendments have not yet been endorsed by the EU. This amendment has no material impact to the Bank’s financial statements.

• IFRS 2: Classification and Measurement of Share based Payment Transactions (amendments) The amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, for share-based payment transactions with a net settlement feature for withholding tax obligations and for modifications to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. These amendments have not yet been endorsed by the EU. These amendments are not expected to have a significant impact on the Bank’s financial statements.

• IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (amendments)The amendments are effective for annual periods beginning on or after 1 January 2018. The amendments address concerns arising from implementing the new financial instruments Standard, IFRS 9, before implementing the new insurance contracts standard that the Board is developing to replace IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption from applying IFRS 9 and an overlay approach, which would permit entities that issue contracts within the scope of IFRS 4 to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets. These amendments have not yet been endorsed by the EU. These amendments are not expected to have a significant impact on the Bank’s financial statements.

• IAS 40: Transfers to Investment Property (amendments)The amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. These amendments have not yet been endorsed by the EU. These amendments are not expected to have a significant impact on the Bank’s financial statements.


• IAS 28: Long-term Interests in Associates and Joint VenturesThe amendments clarify that a company applies IFRS 9 Financial Instruments including its impairment requirements to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture. This amendment is not expected to have a significant impact on the Bank’s financial statements.

• IFRS 9: Prepayment Features with Negative Compensation (amendments) The amendments allow measurement of financial assets at amortized cost (or at fair value through other comprehensive income) even in the case of negative compensation payments if certain conditions are met. These amendments also contain a clarification regarding the accounting for a modification or exchange of a financial liability measured at amortized cost that does not result in the derecognition of the financial liability. The Bank is analyzing the impact of these amendments on its financial statements.

• IFRIC INTERPRETATION 22: Foreign Currency Transactions and Advance ConsiderationThe interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The interpretation covers foreign currency transactions when an entity recognizes a non-monetary asset or a non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The interpretation states that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This interpretation has not yet been endorsed by the EU. This interpretation is not expected to have a significant impact on the Bank’s financial statements.

• The IASB has issued the Annual Improvements to IFRSs 2014–2016 Cycle, which is a collection of amendments to IFRSs.The amendments are effective for annual periods beginning on or after 1 January 2018 for IFRS 1 First-time Adoption of International Financial Reporting Standards and for IAS 28 Investments in Associates and Joint Ventures. Earlier application is permitted for IAS 28 Investments in Associates and Joint Ventures. These annual improvements have not yet been endorsed by the EU. These amendments are not expected to have a significant impact on the Bank’s financial statements.

> IFRS 1 First-time Adoption of International Financial Reporting Standards: This improvement removes the short-term exemptions regarding disclosures about financial instruments, employee benefits and investment entities, applicable for first time adopters.

> IAS 28 Investments in Associates and Joint Ventures: The amendments clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is venture capital organization, or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition.

• IFRS 23 Uncertainty over Income Tax TreatmentsThis IFRIC is effective for periods on or after 1 January 2019, early adoption is permitted. The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatment. This IFRIC has not been endorsed by the EU. This clarification is not expected to have a significant impact on the Bank’s financial statements.

• Annual Improvements to IFRS Standards (2015–2017 Cycle), which is a collection of amendments to IFRSs. The objective is to remove inconsistencies and clarify wording. Following standards were amended: IFRS 3 Business combinations, IFRS 11 Joint ventures, IAS 12 Income taxes and IAS 23 Borrowing costs. There are separate transitional provisions to each standard, all of which are applicable on or after 1 January 2019. These improvements are not expected to have a significant impact on the Bank’s financial statements.

• IAS 19: Plan Amendment, Curtailment or Settlement (amendments)If a plan amendment, curtailment or settlement occurs, it is now mandatory that the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for the remeasurement. In addition, amendments have been included to clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. These amendments have not yet been endorsed by the EU. These amendments are not expected to have a significant impact on the Bank’s financial statements.


(ab) Critical accounting estimates and judgments

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

IMPAIRMENT LOSSES ON LOANS AND ADVANCESThe Bank reviews its loan portfolios to assess impairment at least on a monthly basis.

The amount of impairment loss reflects the decrease in expected future cash flows (payments) from the portfolio of loans.

For receivables that are not past due, the amount of impairment was estimated based on historical observations of credit losses of a homogenous portfolio of clients with similar credit characteristics.

For receivables that are past due, the amount of impairment is calculated as the change in present value of estimated future cash flows. The expected cash flows are estimated based on the financial conditions of individual clients and the realizable value of collateral, using historical observations of the loss portfolio and the profitability of each type of collateral.

Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the provision would be estimated at CZK 33 million lower or CZK 97 million higher (2016: the provision would be estimated at CZK 42 million lower or CZK 106 million higher).

IMPAIRMENT OF AVAILABLE-FOR-SALE EQUITY INVESTMENTSThe Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Bank evaluates, among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

FAIR VALUE OF FINANCIAL INSTRUMENTSThe fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques. The valuation techniques include the net present value and discounted cash flow models, a comparison to similar instruments for which market observable prices exist, and other valuation models. Assumptions and inputs used in valuation techniques include risk-free rates, credit spreads, and other premiums used in estimating discount rates, bond prices and foreign currency exchange rates. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them.

All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practicable, models use only observable data; however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

DEFERRED TAXSignificant estimates are required in determining deferred income tax. There are many transactions for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of temporary differences is different from the amounts that were initially recorded, such differences will impact the current income tax provision and deferred tax in the period in which such a determination is made.


FUTURE COSTSThe Bank estimates significant future costs that are expected to incur while not a regular costs associated with its activities. These estimates are performed at least once a year, or in moments when identifying future event that may cause such expense. These estimates are booked and recorded as reserves. The most significant reserves, which make up the Bank, include provisions for the removal of technical improvements in the leased premises and provisions for litigation.

(ac) Statement of cash flows

The following changes were performed in the statement of cash flows in the column with comparatives compared to the financial information presented in the financial statements for the year ended 31 December 2016:

• The amount originally presented in the row Impairment losses on loans and advances was minus CZK 214 million instead of CZK 214 million by error. Simultaneously, the amount of minus CZK 3,510 million previously presented in the row Loans and advances was corrected to minus CZK 3,938 million.

(CZKm)

Originally reported

2016Restated

2016

Impairment losses on loans and advances (214) 214

Loans and advances (3,510) (3,938)

• The Bank started to disclose the impact of the changes in the foreign exchange rate on cash and cash equivalents. The impact was considered not to be significant in the past.

(CZKm)

Originally reported

2016Restated

2016

Impact of the changes in the foreign exchange rates on cash and cash equivalents 0 20

Net increase / (decrease) in cash and cash equivalents (6,649) (6,669)

• In connection with the new requirement of IAS 7 to present changes in liabilities from financial activities resulting from both cash flows and non-cash changes the Bank decided to present cash flow from financing activities as follows:

(CZKm)

Originally reported

2016Restated

2016

Repayment of mortgage bonds (1,473) (1,438)

Other changes in mortgage bonds 0 (35)


3 Net Interest IncomeInterest and similar income

2017 2016(CZKm)

Loans and advances to customers 1,864 1,875

Debt securities classified as loans and advances to customers 6 15

Due from banks 39 19

Loans and advances to banks 1,909 1,909

Investment securities available for sale 0 11

Total interest and similar income 1,909 1,920

Interest income from loans and advances to customers2017 2016(CZKm)

Receivables from companies and individuals including consumer loans 1,866 1,886

Receivables from municipalities 1 1

Receivables from governmental bodies 1 1

Other receivables from customers 2 2

1,870 1,890

There was CZK 101 million in interest income recognized on impaired receivables in 2017 (2016: CZK 90 million).

There was CZK 64 million in interest income recognized on loans and receivables with forbearance measures in 2017 (2016: CZK 71 million).

Interest and similar expense2017 2016(CZKm)

Due to customers 168 253

Due to banks 13 13

Interests from hedge accounting 10 0

Debt securities in issue 72 115

Total interest expense and similar expense 263 381

Net interest income comprise the net interest expense of CZK 10 million recognized on hedging instruments (2016: CZK 0 million) and CZK 0 million on hedged items (2016: CZK 0 million).


4 Net Fee and Commission Income(CZKm) 2017 2016

Fee and commission income 559 505

Fee and commission expense (151) (140)

408 365

Fee and commission income2017 2016(CZKm)

International payment transactions 170 144

Domestic payment transactions 64 66

Lending business (those which are not regarded as part of the effective interest rate) 95 99

Foreign exchange, foreign notes and coins transactions 159 139

Securities and custody business 19 15

Other 52 42

559 505

Fee and commission income from securities and custody business includes CZK 0 million in fee income from custody activities in 2017 (2016: CZK 0 million).

Fee and commission expense2017 2016(CZKm)

International payment transactions (3) (4)

Domestic payment transactions (3) (2)

Lending business (those which are not part of the effective interest rate) (28) (27)

Foreign exchange, foreign notes and coins transactions (75) (69)

Securities and custody business (1) (2)

Other (41) (36)

(151) (140)

Fee and commission expense from securities and custody business includes CZK 0 million in fee expense from custody activities in 2017 (2016: CZK 0 million).


5 Net Trading Income(CZKm) 2017 2016

Fixed-income securities and money market 0 2

Net foreign exchange gains / (losses) (54) 82

Interest rate contracts 17 (1)

Foreign exchange 211 16

174 99

Net foreign exchange gains include results arising from both customer and proprietary activities in foreign exchange cash, spot, forward, swap and option operations.

6 Net Income from Financial Investments(CZKm) 2017 2016

Net income from sale of securities available for sale 0 25

0 25

7 Administrative Expenses(CZKm) 2017 2016

Personnel expenses 874 828

Depreciation of property and equipment and amortization of intangible assets 109 106

Other general administrative expenses 471 464

1,454 1,398

Personnel expenses2017 2016(CZKm)

Salaries and bonuses of Management Board members 33 33

Salaries and bonuses of senior management 62 50

Salaries and bonuses of Supervisory Board members 0 0

Salaries and bonuses of the employees 554 534

Social security costs 205 192

Other personnel costs 20 19

874 828

Social security costs also include the contribution to the state pension scheme.


MANAGEMENT BONUS SCHEMESalaries and remuneration of the Members of the Management Board, as well as the remuneration principles and structure, are subject to approval by the Supervisory Board. Key performance indicators of the annual performance bonus are based on the financial results of the Group (Sberbank Europe AG), the Bank (Sberbank CZ, a.s.), profit center / segment and the strategic and individual objectives. An annual performance bonus is paid if the requirements set out in the Group guidelines on remuneration and in the Bank internal guidelines General principles of the remuneration are fulfilled. The annual performance bonus can also be reduced or unpaid in relation to the achievement of the performance objectives.

RETIREMENT BENEFITSThe Bank provides its employees with a defined contribution retirement scheme in accordance with Act No. 42/1994 Coll. Participating employees can contribute a percentage of their salaries to a pension fund. The Bank contributes up to CZK 3,600 a year per person. Total Bank’s expense for the retirement scheme in 2017 was CZK 1.3 million (2016: CZK 1.5 million). The expenses for the retirement scheme are recognized on the line ”Other personnel costs“ in the table “Administrative expenses”.

OTHER GENERAL ADMINISTRATIVE EXPENSES

(CZKm) 2017 2016

Rent and leasing 133 143

Information technology 101 97

Marketing and public relations 93 71

Material consumption 31 32

Audit, tax, legal and other consultancy 43 53

Tax and fees 2 2

Other 68 66

471 464

8 Other Operating Income(CZKm) 2017 2016

Gain on disposal of fixed assets 0 10

Income from the services provided within the group 22 27

Other 20 10

42 47

9 Other Operating Expenses(CZKm) 2017 2016

Deposit insurance 16 13

Contribution fund 45 67

Cost of sales of fixed assets 0 1

Other 5 20

66 101


In 2016, extraordinary expenses contained a partial write-off of new multichannel banking in the amount of CZK 19 million due to the change in the infrastructure architecture within the project.

10 Income Tax Expense(CZKm) 2017 2016

Current tax expense 100 93Deferred tax income/expense relating to the origination and reversal of temporary differences (Note 20) 7 (29)

107 64

The following table shows how the tax on the Bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate:

(CZKm) 2017 2016

Profit before taxation 531 336

Applicable rates 19% 19%

Taxation at applicable tax rates 101 64

Tax effect of non-deductible expenses 5 12

Other 1 (12)

107 64

In 2017, the effective tax rate adjusted for the effect of the difference between the actual tax due for 2016 and the calculated estimation of the tax for 2016 (CZK 1 million) was 19.96% (2016: 19.1%).

11 Cash and Balances with Central BanksThe Bank classifies its cash and balances with central banks, except for cash in hand, in the category of financial assets “loans and receivables”.

(CZKm) 31.12.2017 31.12.2016

Loans and deposits to central bank 15,551 11,200

Mandatory minimum reserves with central banks 1,178 1,023

Cash in hand 690 714

Current accounts with central banks 20 38

17,439 12,975

Mandatory minimum reserves with the Czech National Bank (“CNB”) are generally available for use by the Bank, however it is not actively used for day-to-day banking business. The limit of the mandatory minimum reserves are fulfilled according to the average balance in reference period. These deposits bear interest at the CZK repo rate, which was 0.5% as at 31 December 2017 (31 December 2016: 0.05%).


12 Loans and Advances to BanksThe Bank classifies its loans and advances to banks in the category of financial assets “loans and receivables”.

(CZKm) 31.12.2017 31.12.2016

Analyzed by product and bank domicile

Current accounts

Domestic 28 16

Foreign 1,242 1,550

Term deposits

Domestic 0 0

Foreign 622 389

1,892 1,955

Allowances for credit losses 0 0

Net due from banks 1,892 1,955

Loans and advances to banks of CZK 1,577 million (2016: CZK 1,566 million) are included in the item cash and cash equivalents (Note 31).

13 Loans and Advances to CustomersThe Bank classifies its loans and advances to customers in the category of financial assets “loans and receivables”.

(CZKm) 31.12.2017 31.12.2016

Analyzed by product

Investment loans 29,827 31,111

Working capital financing 3,970 4,335

Mortgages 22,758 17,049

Consumer loans 5,123 4,260

Gross loans and advances 61,678 56,755

Allowance for impairment (Note 14) (1,195) (1,142)

Net loans and advances 60,483 55,613

In 2017 and 2016, the Bank pledged no loans and advances to customers as collateral for received loans and advances.

For an analysis of individual categories of loans and advances to customers according to their credit quality see Note 33 (b).


14 Impairment Charge for Credit LossesThe movement in allowance for impairment of loans and advances to customers can be analyzed as follows:

(CZKm) Retail Corporate Total

As at 1.1.2016 579 688 1,267

Allocation to provision for loan impairment 343 312 655

Reversal of provision for loan impairment (274) (160) (434)

Loans written off during the year as uncollectible (321) (25) (346)

Net foreign exchange difference 0 0 0

As at 31.12.2016 327 815 1,142

Allocation to provision for loan impairment 312 376 688

Reversal of provision for loan impairment (303) (168) (471)

Loans written off during the year as uncollectible (163) 0 (163)

Net foreign exchange difference (1) 0 (1)

As at 31.12.2017 172 1,023 1,195

Segments Corporate/Retail are determined in accordance with the Basel III standardized approach as opposed to Note 32, where the segments are defined based on the Bank’s organizational structure.

The Bank also realized a loss amounting to CZK 61 million (2016: CZK 68 million) on ceded receivables. The loss is recognized in the “impairment charge for credit losses”.


15 Derivative Financial InstrumentsThe Bank’s trading activities primarily involve providing various derivative products to its customers and managing positions for its own account. The trading derivatives also include those derivatives which are used for asset and liability management (ALM) purposes to manage the interest rate position and which do not meet the criteria of hedge accounting.

The contract or notional amounts and positive and negative fair values of the Bank’s outstanding derivative trading positions as at 31 December 2017 and 31 December 2016 are set out in the table below. The contract or notional amounts represent the volume of outstanding transactions at a point in time; they do not represent the potential for gain or loss associated with market risk or credit risk of such transactions.

TRADING DERIVATIVE FINANCIAL INSTRUMENTS31.12.2017 31.12.2016

(CZKm)

Con-tract/

NominalAssets

Con-tract/

NominalLiabilities

Fair value

positive

Fair value

negative

Con-tract/

NominalAssets

Con-tract/

NominalLiabilities

Fair value

positive

Fair value

negative

Interest rate derivatives

Swaps 4,815 4,815 61 39 3,819 3,819 19 13

4,815 4,815 61 39 3,819 3,819 19 13

Foreign exchange derivatives

Swaps 9,186 9,087 127 50 5,620 5,537 90 12

Forwards 3,549 3,650 4 96 833 829 4 5

12,735 12,737 131 146 6,453 6,366 94 17

Total 17,750 17,552 192 185 10,272 10,185 113 30

Fair value gains less losses of trading derivatives are recognized within the Net trading income in the Statement of comprehensive income..

FAIR VALUE HEDGING DERIVATIVE FINANCIAL INSTRUMENTSAn interest rate risk arises when interest-sensitive assets have different maturities or repricing characteristics than the corresponding interest-sensitive liabilities. The Bank’s objective formanaging interest rate risk in the Banking Book is to reduce the structural interest rate risk and thus the volatility of net interest margins.

The Bank used interest rate swaps to hedge its exposure to changes in the fair value of a part of its fixed-rate loans as at 31 December 2017.

The Bank had no hedge relationship as at 31 December 2016.


Derivatives meeting the criteria of hedge accounting for fair value hedges are set out in the table below.

31.12.2017 31.12.2016

(CZKm)

Con-tract/

NominalAssets

Con-tract/

NominalLiabilities

Fair value

positive

Fair value

negative

Con-tract/

NominalAssets

Con-tract/

NominalLiabilities

Fair value

positive

Fair value

negative

Interest rate derivatives

Swaps 5,200 5,200 57 2 0 0 0 0

5,200 5,200 57 2 0 0 0 0

The loss due to changes in the fair value of hedged items was CZK 70 million in 2017 (2016: nil).

The gain on hedging derivatives used for fair value hedging was 55 million in 2017 (2016: nil).

16 Financial Assets at Fair Value Through Profit or Loss Securities held for trading

31.12.2017 31.12.2016(CZKm)

Debt securities 0 0

17 Investment Securities(CZKm) 31.12.2017 31.12.2016

Securities in category loans and receivables

Debt securities thereof:

– Unlisted 245 245

245 245

(CZKm)Securities

available for sale

Securities in category loans

and receivablesSecurities

held to maturity Total

As at 1.1.2016 1,211 1,353 0 2,564

Additions 92 250 0 342

Disposals (1,257) (1,358) 0 (2,615)

Gains / (losses) from changes in fair value (46) 0 0 (46)

As at 31.12.2016 and 31.12.2017 0 245 0 245

The Bank pledged no securities as at 31 December 2017 and 31 December 2016.


18 Intangible Assets

(CZKm) SoftwareDevelopment

in progress Other Total

Costs

As at 1.1.2016 476 59 1 536


Transfer 0 0 0 0

Disposal 0 (25) 0 (25)

As at 31.12.2016 524 158 1 683


Transfer 0 0 0 0

Disposal (2) 0 (1) (3)

As at 31.12. 2017 696 244 0 940

Accumulated amortization

As at 1.1.2016 (383) 0 (1) (384)

Amortization charge (31) 0 0 (31)

Disposals (accumulated amortization) 0 0 0 0

As at 31.12.2016 (414) 0 (1) (415)

Amortization charge (50) 0 0 (50)

Disposals (accumulated amortization) 1 0 1 2

As at 31.12.2017 (463) 0 0 (463)

Net book value

As at 1.1.2016 93 59 0 152

As at 31.12.2016 110 158 0 268

As at 31.12.2017 233 244 0 477


19 Property and Equipment

(CZKm)Land and buildings

Leasehold improve-

ment Equipment OtherConstruction

in progress Total

Costs

As at 1.1.2016 180 185 216 171 4 756

Additions 0 16 32 29 5 82

Transfer 0 0 0 0 0 0

Disposal 0 (17) (38) (60) (3) (118)

As at 31.12.2016 180 184 210 140 6 720

Additions 0 7 8 18 12 45


Disposal 0 (1) (10) (10) (6) (27)

As at 31.12.2017 180 190 208 148 12 738

Accumulated depreciation

As at 1.1.2016 (109) (80) (161) (115) 0 (465)

Depreciation charge (5) (18) (21) (26) 0 (70)


Disposals (accumulated depreciation) 0 12 35 50 0 97

As at 31.12.2016 (114) (86) (147) (91) 0 (438)

Depreciation charge (6) (17) (20) (16) 0 (59)


Disposals (accumulated depreciation) 0 1 11 10 0 22

As at 31.12.2017 (120) (102) (156) (97) 0 (475)

Net book value

As at 1.1.2016 71 105 55 56 4 291

As at 31.12.2016 66 98 63 49 6 282

As at 31.12.2017 60 88 52 51 12 263


20 Deferred Tax AssetsDeferred taxes in 2017 are calculated on all temporary differences under the liability method using the 19% income tax rate which is supposed to be applicable at recognition (19% for 2016).

The movement on the deferred tax account is as follows:

(CZKm) 2017 2016

As at 1.1. 88 54

Deferred tax income/expense relating to the origination and reversal of temporary dif-ferences (Note 10) (7) 29

Available-for-sale securities

Fair value re-measurement (Note 28) 0 5

Remeasurements of employee benefits (Note 28) 0 0

As at 31.12. 81 88

Deferred tax asset and liability are attributable to the following items:

(CZKm) 31.12.2017 31.12.2016

Allowance for impairment 56 58

Fixed assets (6) (6)

Provisions 31 36

81 88

The deferred tax (debit) / credit in the statement of income comprises of the following temporary differences:

(CZKm) 2017 2016

Allowance for impairment (2) 9

Depreciation of fixed assets 0 1

Reserves (5) 19

Total (Note 10) (7) 29

The Bank’s management believes it is probable that the Bank will fully realize its gross deferred income tax assets based upon the Bank’s current and expected future level of taxable profits and the expected offset from gross deferred income tax liabilities.


21 Other Assets(CZKm) 31.12.2017 31.12.2016

Prepayments and accrued income 64 50

Other debtors, net of provisions 50 57

Anticipated receivables 4 5

Other clients receivables 0 133

Cash in transfer 236 161

Other receivables 51 20

405 426

22 Deposits from BanksThe Bank classifies its deposits from banks in the category of financial liabilities “measured at amortized cost”.

(CZKm) 31.12.2017 31.12.2016

Analyzed by product and bank domicile

Current accounts

Domestic 2 1

Foreign 496 343

Term deposits

Domestic 255 0

Foreign 4,437 2,836

Borrowings

Domestic 0 0

Foreign 0 180

Other

Domestic 0 0

Foreign 197 107

5,387 3,467

The Bank provided collateral for its obligations by pledge of securities (Note 17) and pledges of receivables (Note 13).

Deposits from banks in the amount of CZK 4,876 million (31 December 2016: CZK 2,069 million) are included in the item cash and cash equivalents (Note 31).


23 Due to CustomersIn 2017 and 2016, the Bank did not record any due to customers measured at fair value against profit and loss accounts. The Bank classifies its due to customers in the category of financial liabilities “measured at amortized cost”.

Due to customers measured at amortized cost31.12.2017 31.12.2016(CZKm)

Analyzed by product

Current accounts 25,405 20,968

Term deposits 9,443 5,125

Savings accounts with notice period 1 2

Savings accounts 29,280 29,692

64,129 55,787

Analyzed by customer type

Private companies 22,286 18,391

Individual – households 26,697 27,265

Individual – entrepreneurs 2,661 2,327

Government bodies 8,042 5,317

Non-profit institutions 568 482

Insurance companies and pension funds 1,938 1,640

Other financial institutions 1,937 365

64,129 55,787

The Bank has not provided any collateral for its liabilities.


24 Debt Securities in IssueThe Bank classifies its debt securities in issue in the category of financial liabilities “measured at amortized cost”.

(CZKm) Issue dateCur-rency Maturity date 31.12.2017 31.12.2016

Issued mortgage bonds

Issue HZL 5,30/17 18.12.2007 CZK 18.12.2017 0 803

Issue HZL VAR1/17 22.3.2012 CZK 22.3.2017 0 486

Issue HZL 2,30/18 24.10.2013 CZK 24.10.2018 852 898

Issue HZL 2,00/20 26.6.2014 CZK 26.6.2020 1,055 1,075

Issue HZL 1,10/17 5.9.2014 CZK 5.9.2017 0 0

1,907 3,262

Promissory notes and certificates of deposits

Promissory notes and certificates of deposits short-term 7 0

Promissory notes and certificates of deposits long-term 0 0

7 0

Debt securities in issue 1,914 3,262

The changes in the debt securities in issue can be analysed as follows:

(CZKm)Mortgage

bonds

Promissory notes and

certificates of deposits Total

As at 1.1.2016 4,735 1,034 5,769

Withdrawal 0 0 0

Repayment (1,438) (1,034) (2,472)

Other changes (35) 0 (35)

As at 31.12.2016 3,262 0 3,262

Withdrawal 0 7 7

Repayment (1,337) 0 (1,337)

Other changes (18) 0 (18)

As at 31.12.2017 1,907 7 1,914

In 2017, the Bank did not issue any mortgage bonds. The Bank repaid three mortgage bonds issues in 2017. The first issue in the nominal amount of CZK 800 million (HZL 5.30/17), the second issue in the nominal amount of CZK 500 million (HZL VAR1/17) and the third issue in the nominal amount of CZK nil (HZL 1.10/17).

Issued mortgage bonds are collateralized by the Bank’s receivables arising from the granted mortgages in line with Czech regulatory requirements.


25 Other Liabilities and Accruals and Deferred Income(CZKm) 31.12.2017 31.12.2016

Accruals and deferred income 20 16

Payments in transit 137 60

Other clearing accounts 362 435

Other creditors 238 207

Payables to the Securities Traders Guarantee Fund 1 1

Anticipated payables 41 38

VAT and other tax payables 8 10

Other 21 14

828 781

26 Provisions

(CZKm)

Provision for financial guarantees

and other contingent liabilities

Other operating provision

Total provisions

As at 1.1.2016 16 43 59

Release (24) (15) (39)

Cover of costs 0 (3) (3)

Additions 48 26 74

Remeasurements 0 0 0

As at 31.12.2016 40 51 91

Release (26) (41) (67)

Cover of costs 0 (13) (13)

Additions 16 13 29

Remeasurements (1) 0 (1)

As at 31.12.2017 29 10 39

Other operating provision includes also provisions for the removal of technical improvements for the property of third parties, The Bank performed mainly in connection with the lease contracts to the premises in which the Bank operates its banking business.


27 Subordinated Debt

(CZKm) Total

As at 29.12.2016 0

Withdrawal 189

As at 31.12.2016 189

Foreign exchange differences (10)

As at 31.12.2017 179

The Bank classifies its subordinated debt in the category of financial liabilities “measured at amortized cost”.

The Bank received the subordinated debt of EUR 7 million from its parent company Sberbank Europe AG, the sole shareholder, on 29 December 2016. The annual interest rate of the subordinated debt is 3.721% p.a. and its maturity is 29 December 2023. The Bank has drawn this subordinated debt to cover the capital buffer internally defined by the Bank. The purpose of this buffer is to ensure the fulfillment of requirement for the total capital adequacy ratio. The subordinated debt was drawn under standard market conditions.

28 EquityThere was no change in issued shares in 2017 and 2016.

Issued shares carry standard shareholder’s rights. Shares do not carry any special rights that would, for example, restrict or prioritize dividend payment or allow repayment equity back to shareholders.

Share capital31.12.2017 31.12.2016(CZKm)

Voting shares 2,806 2,806

Non-voting shares 0 0

Issued, paid and registered by the Commercial register 2,806 2,806


Issues of shares

ISIN Date of issueNominal value

of share Number of shares Nominal value

CZK CZKm

CZ0008040201 23.10.1998 5,000 30,000 150

CZ0008040201 23.10.1998 5,000 100,000 500

CZ0008040201 7.8.2002 5,000 4,600 23

CZ0008040201 7.8.2002 5,000 15,400 77

CZ0008040201 23.11.2005 5,000 3,165 16

CZ0008040201 23.11.2005 5,000 10,555 53

CZ0008040201 31.7.2006 5,000 6,565 33

CZ0008040201 31.7.2006 5,000 21,895 109

CZ0008040201 20.12.2006 5,000 8,479 42

CZ0008040201 20.12.2006 5,000 28,281 142

CZ0008040201 16.5.2007 5,000 8,336 42

CZ0008040201 16.5.2007 5,000 27,804 139

CZ0008040201 21.12.2007 5,000 16,488 82

CZ0008040201 21.12.2007 5,000 54,992 275

CZ0008040201 30.7.2008 5,000 14,882 74

CZ0008040201 30.7.2008 5,000 49,634 248

CZ0008040201 18.4.2014 5,000 160,122 801

561,198 2,806

As at 31 December 2017, the nominal value of ordinary securities is CZK 5,000. As at 31 December 2016, the nominal value of ordinary securities was CZK 5,000.

Cumulative gains not recognized in the profit for the period may be analyzed as follows:

(CZKm) 2017 2016

As at 1.1. 0 21

Net gains/(losses) from changes in fair value of available-for-sale securities 0 (45)

Net gains from the sale of available-for-sale securities 0 19

Changes in fair value due to hedge accounting 0 0

Changes in provision for employee benefits 0 0

Change in deferred income taxes (Note 20) 0 5

As at 31.12. 0 0


29 Contingent Liabilities and CommitmentsCommitments to provide a loan, loan guarantees to third parties and guarantees from acceptance of letters of credit expose the Bank to credit risk and to loss in the event of a client’s inability to meet his obligations. Various commitments and contingent liabilities arise in the normal course of business involving elements of credit, interest rate and liquidity risk.

Contingent liabilities include:

(CZKm)

31.12.2017Contract amount

31.12.2016Contract amount

Documentary credits 12 81

Financial guarantees 1,907 1,164

Provision for guarantees (Note 26) (23) (22)

Net financial guarantees 1,896 1,142

Undrawn formal standby facilities, credit lines 5,916 3,805

Provision for un-drawn credit lines (Note 26) (6) (18)

Net un-drawn formal standby facilities, credit lines 5,910 3,787

Total in gross amount 7,806 4,929

Undrawn credit lines are irrevocable.

For the purpose of the calculation of the provision for credit risk exposures relating to off-balance sheet items, the Bank considers the probability of outflow for loans and advances in default as follows:

– If the client is classified as substandard, the probability of outflow is 50% for issued financial guarantees.

– If the client is classified as doubtful or loss, the probability of outflow is 100% for issued financial guarantees.

– If the client is classified as substandard, doubtful or loss, the probability of outflow is 100% for credit-related commitments.

– If the client is classified as substandard, doubtful or loss, the probability of outflow is 100% for letters of credit.

Uncertainties about the amount or timing of any resulting outflows of economic benefits are summarized in the probability of outflow and the credit conversion factor (which is 50% for loan commitments and letters of credit and 100% for guarantees) and are reflected in the provision.

The Bank assumes that the possibility of any outflow in the settlement is remote for loans and advances without default.

The amount and timing of the drawdown of off-balance assets are calculated with internal models. Drawdown can happen anytime during the lifetime of the contract.


30 Other Contingent LiabilitiesLITIGATIONAs of 31 December 2017, there is no litigation, which is expected to have a significant impact on the financial position of the Bank.

TAXATIONCzech tax legislation, interpretation and guidance are still evolving. Consequently, under the current taxation environment, it is difficult to predict the interpretations the respective tax authorities may apply in a number of areas. As a result, the Bank has used its current understanding of the tax legislation in the design of its planning and accounting policies. The effect of the uncertainty cannot be quantified.

Czech tax authorities are authorized to perform tax inspections for three years retrospectively. The last tax inspection was for the year 2007.

ASSETS UNDER MANAGEMENT AND CUSTODY

(CZKm) 31.12.2017 31.12.2016

Assets held under custody 7 0

Assets held under custody are shown at their nominal value.

(CZKm) 31.12.2017 31.12.2016

Assets held under management 3,200 5,808

Assets held under management are shown at their fair value.

Management considers that no present obligations were associated with these fiduciary duties as at 31 December 2017 and 31 December 2016.

OPERATING LEASE COMMITMENTS (THE BANK AS LESSEE)Future minimum lease payments (cash outflow) under land, building and equipment operating leases are as follows:

(CZKm) 31.12.2017 31.12.2016

Up to 3 months 26 29

Not later than 1 year 72 72

Later than 1 year and not later than 5 years 234 249

Later than 5 years 27 30

359 380

OPERATING LEASE RECEIVABLES (THE BANK AS LESSOR)The Bank does not have any future minimum lease payments (cash inflow) under land, building and equipment operating lease contracts in years 2017 and 2016.


31 Cash and Cash EquivalentsAnalysis of the balances of cash and cash equivalents as shown in the balance sheets:

(CZKm) 31.12.2017 31.12.2016 1.1.2016

Cash and balances with central banks (Note 11) 17,439 12,975 19,989

Loans and advances to banks due up to 3 months (Note 12) 1,577 1,566 1,205

Deposits from banks due up to 3 months (Note 22) (4,876) (2,069) (2,073)

14,140 12,472 19,121

32 Operating SegmentsThe Bank has the following four reportable segments in 2017 and 2016. These operating segments are the Bank’s strategic business units which offer different products and services, and are managed separately because they require different technology, product distribution and service rendering methods and marketing strategies. The Management Board reviews the internal management reports for each of these strategic business units on a monthly basis.

• Retail banking: Private individuals and entrepreneurs and companies with a turnover of less than EUR 1 million;

• Corporate banking: Companies with turnover greater than EUR 50 million and non-banking institutions in the financial sector;

• SME banking: Small companies and entrepreneurs with turnover up to EUR 50 million;

• Treasury: Asset and liability management, dealing.

The result of other Bank activities (head office expenses, unallocated expenses and eliminating and reconciling items) is reported within the reconciliation of the reportable segment revenues, profit or loss, assets and liabilities and other material items with corresponding items in the Bank’s financial statements. The methods of reporting the segments’ profit and loss, assets and liabilities is in accordance with the methods of reporting profit and loss, assets and liabilities of the aggregate Bank level.

In 2017 and 2016, no client of the Bank (or group of related persons) constituted more than 10% of the total revenues of the Bank.

The accounting policies of the reportable segments are the same as described in Note 2.

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Bank’s Management Board.


Operating segment information for 2017

(CZKm)Retail

BankingCorporate

Banking SME Treasury Total

Net interest income 815 289 554 (12) 1,646

Non-interest income 215 171 193 45 624

Total segment revenue 1,030 460 747 33 2,270

Segment expense (510) (69) (138) (51) (768)

Other material non-cash items:

Allocation to provision for loan impairment (234) (220) (696) 0 (1,150)

Reversal of provision for loan impairment 215 13 715 0 943

Loans written off during the year as uncollectible 0 0 2 0 2

Provisions and other operating costs 0 0 0 0 0

Reportable segment profit before income tax 501 184 630 (18) 1,297

Reportable segment assets 31,057 9,243 20,425 20,739 81,464

Reportable segment liabilities 34,991 10,659 19,651 7,409 72,710

Capital expenditure 114 34 75 76 299

Depreciation (56) (3) (4) (46) (109)

Operating segment information for 2016

(CZKm)Retail

BankingCorporate

Banking SME Treasury Total

Net interest income 717 237 536 49 1,539

Non-interest income 175 112 192 57 536

Total segment revenue 892 349 728 106 2,075

Segment expense (495) (74) (129) (72) (770)

Other material non-cash items:

Allocation to provision for loan impairment (260) (32) (773) 0 (1,065)

Reversal of provision for loan impairment 167 5 672 0 844

Loans written off during the year as uncollectible 3 1 3 0 7

Provisions and other operating costs 0 0 0 0 0

Reportable segment profit before income tax 307 249 501 34 1,091

Reportable segment assets 24,724 10,589 20,686 15,966 71,965

Reportable segment liabilities 35,303 5,943 15,330 7,059 63,635

Capital expenditure 87 37 73 57 254

Depreciation (50) (4) (4) (48) (106)


Reconciliations of reportable segment profit before income tax and assets and liabilities

(CZKm) 2017 2016

Profit before income tax

Total profit before income tax for reportable segments 1,297 1,091

Unallocated expenses (766) (755)


Assets

Total assets for reportable segments 81,464 71,965

Unallocated assets 0 0

Total assets 81,464 71,965

Liabilities

Total liabilities for reportable segments 72,710 63,635

Unallocated liabilities 0 0

Total liabilities 72,710 63,635

Total Bank revenue is generated solely by the reportable segments.

The vast majority of the Bank’s total revenues is generated from customers domiciled in the Czech Republic.

All of the Bank’s Property, plant and equipment and intangible assets are located in the Czech Republic.

33 Financial Risks(a) Strategy in using financial instruments

The Bank’s activities are principally related to the use of financial instruments. The Bank accepts deposits from customers at both fixed and floating interest rates and for various periods and seeks to earn above-average interest margins by investing these funds in high quality assets. The Bank seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might become due.

The Bank seeks to raise its interest margins by obtaining above-average margins, net of provisions, through lending to commercial and retail borrowers with a range of credit standings. Such exposures involve not just on-balance sheet receivables and advances but the Bank also enters into guarantees and other commitments such as letters of credit and other similar contingent liabilities.

(b) Credit risk

The Bank defines credit risk as the risk that counterparty will cause a financial loss for the Bank by failing to discharge a contractual obligation.

Credit risk management is performed in close co-operation with the Bank’s parent company and together with the Bank’s strategy and risk appetite reflects the risk strategy and risk-appetite of shareholders.


A conservative strategy for credit risk management is applied. Considered within the general context of the overall business relations existing with each respective customer, every transaction for which the Bank knowingly undertakes risk should yield a contribution margin that is commensurate with the specific risk incurred.

The Bank structures the levels of accepted credit risk by regular measurement of the risk exposure, monitoring of the limits and taking appropriate procedures leading to a decrease in the accepted level of credit risk. This process is performed for each individual borrower and the whole loan portfolio. When deciding about the acceptance of a new exposure, an analysis of the customer’s cash flow and the overall financial situation is a key factor, as well as the existing experience with the customer together with the quality of received collateral. The decision-making is performed independently from the sales units.

In 2015, the ČNB performed an inspection focused on the credit risk management and risks associated with lending process, the liquidity risk management system and the internal capital adequacy process (“ICAAP”).

The ČNB subsequently started administrative proceedings with the Bank on the results of this inspection on 16 March 2016 in order to remedy all of the findings, which were identified during the inspection. The ČNB restricted the following operations as part of the administrative proceedings:

a) approving new and increasing existing exposures exceeding 15% of regulatory capital

b) increasing exposures in the “project finance” and “commercial real estate” segments

c) approving exposures where maturity repayment exceeds 50% of the loan’s principal

During the inspection in 2015, and subsequently during the administrative proceedings in 2016, the Bank continuously adopted appropriate measures to improve its internal processes and to eliminate findings. These measures were continuously communicated to the ČNB. On 7 June 2016, the ČNB delivered a note to lift restrictions under letter c) of the preceding paragraph. Subsequently, on 7 September 2016 the ČNB delivered another separate decision to lift the restrictions under letter a) of the preceding paragraph. This decision also confirmed the ČNB limitation according to point b) of the previous paragraph for cases where the approval of loan transaction is based on the project rating. As of 31 December 2016, the Bank eliminated almost all findings which were the result of inspection and subject of the administrative proceedings described above.

After further improvements in the last restricted area were made the Bank applied to the ČNB to cancel this decision. On 17 February 2017, the ČNB delivered a notification to the Bank which complied with the Bank’s request and restrictions on lending activity in the aforementioned segments no longer apply.

The capital requirement for credit risk in the investment portfolio is calculated using the standardized approach.


The table below summarizes the maximum exposure to credit risk before collateral held or other credit enhancements. Included in the table are the Bank’s assets and liabilities at carrying amounts (after impairment).

MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS

(CZKm) 31.12.2017 31.12.2016

Credit risk exposures relating to on-balance sheet assets


Loans and advances to customers:

– Corporate loans



Mortgages 77 100

Consumer loans 0 0

– Retail loans



Mortgages 22,632 16,866


Derivative financial instruments 249 113

Financial assets at fair value through profit or loss

Debt securities 0 0

Investment securities

Debt securities 245 245

Other exposures 405 426

Credit risk exposures relating to off-balance sheet items (nominal amount)


Loan commitments and other credit related liabilities 5,928 3,886

71,109 63,402

Corporate loans include loans and advances to customers with a total exposure above EUR 1 million or with annual turnover of at least EUR 50 million. Segments Corporate/Retail are determined in accordance with the Basel III standardized approach for calculation of the capital requirement for credit risk in investment portfolios as opposed to Note 32, where the segments are defined based on the Bank’s organizational structure.


FINANCIAL EFFECT OF COLLATERAL HELD AND OTHER CREDIT ENHANCEMENTS

(CZKm) 31.12.2017 31.12.2016


Loans and advances to banks 0 0


– Corporate loans


Working capital financing 687 777

Mortgages 72 88

– Retail loans


Working capital financing 648 644

Mortgages 19,130 14,129


37,100 33,748


MAXIMUM EXPOSURE TO CREDIT RISK AFTER COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS

(CZKm) 31.12.2017 31.12.2016




– Corporate loans



Mortgages 5 12

Consumer loans 0 0

– Retail loans



Mortgages 3,502 2,737


Derivative financial instruments 249 113


Debt securities 0 0

Investment securities

Debt securities 245 245

Other exposures 405 426

Credit risk exposures relating to off-balance sheet items (nominal amount)


Loan commitments and other credit related liabilities 5,928 3,886

34,009 29,654

Only balance sheet items are subject to collaterals and other credit enhancements received.


COLLATERAL HELD AND OTHER CREDIT ENHANCEMENTSCollateral held and other credit enhancements may be summarized by the collateral type as follows:

(CZKm) 31.12.2017 31.12.2016

Financial effect of collateral held and other credit enhancements

Bank and similar guarantees 1,247 1,439

Mortgage right on real estate 32,176 28,309

Financial collateral 751 594

Other 2,926 3,406

37,100 33,748

Accounting policies for collaterals are presented in the Note 2 (z).

In 2014, the Bank received a guarantee agreement from Sberbank Europe covering the difference between the estimation of market value of collateral and the value of collateral that the Bank accepts for risk purposes. Value of this guarantee is CZK 53.3 million and is part of the line “Financial collateral”.

In 2015–2017, the Bank received no cash-flow from the guarantee described. The amount of the guarantee was reduced to an amount of CZK 35 million in year 2015 and to CZK 23 million in 2016 because of the derecognition of two loans covered by the guarantee. There was no loss connected with the derecognition that should be covered by cash-flow from the guarantee. The amount of the guarantee was CZK 22 million in 2017.

LOANS AND ADVANCESThe Bank’s exposure to credit risk from loans and advances is summarized as follows:

31.12.2017 31.12.2016

(CZKm)

Loans and advances to

customers


banks


customers


banks

Neither past due nor impaired 58,123 1,892 53,333 1,955

Past due but not impaired 205 0 165 0

Individually impaired 3,350 0 3,257 0

Gross loans and advances 61,678 1,892 56,755 1,955

Allowances for impairment (1,195) 0 (1,142) 0

Net loans and advances 60,483 1,892 55,613 1,955

Total amount of the loans and advances to customers which are neither past due nor impaired consist of CZK 22,780 million (31 December 2016: CZK 24,037 million) loans and advances provided to the corporate clients and CZK 35,343 million (31 December 2016: CZK 29,296 million) loans and advances provided to the retail clients.

The total impairment provision for loans and advances as at 31 December 2017 is CZK 1,195 million (31 December 2016: CZK 1,142 million) of which CZK 904 million (31 December 2016: CZK 842 million) represents the individually impaired loans; the remaining amount of CZK 291 million (31 December 2016: CZK 300 million) represents the portfolio provision.


INTERNAL RATING OF LOANS AND ADVANCES AND CNB CATEGORIZATIONThe Bank uses internal rating models for the purposes of managing and monitoring the quality of the loan portfolio.

Each borrower is based on its credit quality assigned to specific rating grade. This rating grade represents the probability of client default within one year (“PD”).

The current rating scale consists of 26 rating grades, where the 26th grade is reserved for customers in default (for Corporate banking grade 25 also indicates default)

The internal rating has to be periodically updated. Validation and parameter changes are carried out in cooperation with the parent company.

Individually not impaired loans and advances (loans and advances without default) are classified as follows (rating grades 1-25) in accordance with CNB’s regulations:

• standard, when principal and interest payments are regularly paid and none of them are overdue for more than 30 days, no receivable from the debtor has been restructured in the last two years because of the deterioration of debtor’s financial situation and there is no reason to doubt the full repayment without the usage of collateral for collecting the receivable,

• watched, when there has been an identified deterioration of the debtor’s financial situation since the recognition of the receivable or principal or interest payments are paid with problems, but none of them is overdue more than 90 days or no receivable from the debtor has been restructured within last 6 months because of the deterioration of debtor’s financial situation and with regard to the financial and economic situation of the debtor is probable full collection of the receivable without the usage collateral for collecting the receivable.

Individually impaired loans and advances (loans and advances in default) are classified as follows (rating grade 26 or grade 25 for Corporate banking) in accordance with CNB’s regulations:

• non-standard, when its full repayment is uncertain because of the financial and economic situation of the debtor; partial repayment is highly probable without the usage of collateral for collecting the receivable. The receivable is considered as substandard even if the principal or interest payments are paid with difficulty, but none of them is overdue for more than 180 days,

• Doubtful, when full repayment is highly improbable mainly because of the financial and economic situation of the debtor; partial repayment is possible and probable without the necessity to use collateral for collecting the receivable. Receivable is considered doubtful even if the principal or interest payments are paid with difficulty, but none of them is overdue for more than 360 days,

• loss, when full repayment is impossible because of the financial and economic situation of the debtor, it is expected that this receivable will not be recovered or will be recovered only partially in a very small amount, without the usage collateral for collecting the receivable. The receivable is considered a loss even if the principal or interest payments are overdue for more than 360 days. A loss is also considered a receivable from a debtor whose assets were declared bankrupt, unless it concerns a claim against the asset of arising after the declaration of bankruptcy.


Rating scale (valid since 1 January 2015):

Rating Grade Risk Min PD Average PD Max PD

1 Low 0.00% 0.02% 0.03%

2 Low 0.03% 0.04% 0.04%

3 Low 0.04% 0.05% 0.06%

4 Low 0.06% 0.07% 0.08%

5 Low 0.08% 0.10% 0.11%

6 Low 0.11% 0.13% 0.16%

7 Low 0.16% 0.18% 0.22%

8 Low 0.22% 0.25% 0.30%

9 Low 0.30% 0.35% 0.41%

10 Low 0.41% 0.48% 0.56%

11 Low 0.56% 0.66% 0.78%

12 Low 0.78% 0.91% 1.07%

13 Medium 1.07% 1.25% 1.47%

14 Medium 1.47% 1.73% 2.02%

15 Medium 2.02% 2.38% 2.79%

16 Medium 2.79% 3.27% 3.84%

17 Medium 3.84% 4.51% 5.29%

18 Medium 5.29% 6.20% 7.28%

19 High 7.28% 8.54% 10.03%

20 High 10.03% 11.77% 13.81%

21 High 13.81% 16.20% 19.01%

22 High 19.01% 22.31% 26.19%

23 High 26.19% 30.73% 36.06%

24 High 36.06% 42.32% 49.66%

25 High 49.66% 58.28% 100.00%

26 Default 100.00% 100.00% 100.00%


Table of external ratings converted to the internal rating:

Rating Grade Risk

PD(for 1 year) Rating S&P Rating Fitch

Rating Moody's

1 Low 0.02% AAA AAA Aaa

1 Low 0.02% AA+ AA+ Aa1

1 Low 0.02% AA AA Aa2

1 Low 0.02% AA- AA- Aa3

1 Low 0.02% A+ A+ A1

2 Low 0.04% A A A2

3 Low 0.05% A- A- A3

4 Low 0.07% A- A- A3

5 Low 0.10% BBB+ BBB+ Baa1

6 Low 0.13% BBB+ BBB+ Baa1

7 Low 0.18% BBB BBB Baa2

8 Low 0.25% BBB- BBB- Baa3

9 Low 0.35% BBB- BBB- Baa3

10 Low 0.48% BB+ BB+ Ba1

11 Low 0.66% BB+ BB+ Ba1

12 Low 0.91% BB BB Ba2

13 Medium 1.25% BB- BB- Ba3

14 Medium 1.73% BB- BB- Ba3

15 Medium 2.38% B+ B+ B1

16 Medium 3.27% B B B2

17 Medium 4.51% B B B2

18 Medium 6.20% B- B- B3

19 High 8.54% CCC+ CCC+ Caa1

20 High 11.77% CCC+ CCC+ Caa1

21 High 16.20% CCC CCC Caa2

22 High 22.31% CCC- CCC- Caa3

23 High 30.73% CC CC Ca

24 High 42.32% C C C

25 High 58.28% C C C

26 Default 100.00% C C C


LOANS AND ADVANCES NEITHER PAST DUE NOR IMPAIREDLoans and advances which are not overdue are allocated to this category. These loans and advances are not individually impaired.

Loans and receivables, individually not impaired:31.12.2017 31.12.2016(CZKm)

Low risk 30,824 27,022

Medium risk 25,300 22,785

High risk 1,999 3,526

Default 0 0

Gross loans and receivables, individually not impaired 58,123 53,333

Portfolio allowance for impairment for credit risks (274) (282)

Net loans and receivables, individually not impaired 57,849 53,051

LOANS AND ADVANCES PAST DUE BUT NOT IMPAIREDLoans and advances from 1 up to 90 days overdue are generally not considered to be impaired by an individual impairment provision.

Loans and receivables past due, individually not impaired:31.12.2017 31.12.2016(CZKm)

Low risk 8 8

Medium risk 72 40

High risk 125 117

Default 0 0

Gross loans and receivables, individually not impaired 205 165

Portfolio allowance for impairment for credit risks (17) (18)

Net loans and receivables, individually not impaired 188 147

The table below summarizes the gross amount of loans and advances to customers past due but not impaired by business segment along with the fair value of related collateral held by the Bank as security.

31.12.2017 31.12.2016

(CZKm)

Loans and advances past

due but not impaired

Financial effect of received

collaterals

Loans and advances past

due but not impaired

Financial effect of received

collaterals

Corporate 20 8 10 4

Retail 185 104 155 84

Total 205 112 165 88


The table below summarizes the term structure of overdue loans:

Gross loans and receivables past due, individually not impaired31.12.2017 31.12.2016(CZKm)

1–30 days overdue 134 109



Total gross amount 205 165

As at 31 December 2017, from the total loans and advances past due but not impaired 65% were overdue by up to 1 month (2016: 66%).

INDIVIDUALLY IMPAIRED LOANS AND ADVANCESThe Bank performs an assessment for the individual impairment of loans and advances that are above the materiality threshold. Individually, impaired loans and advances include exposures corresponding to the sub-categories of substandard, doubtful and loss loans and receivables in accordance with regulatory classifications. Therefore, they also include loans and advances more than 90 days overdue. The remaining loans and advances from financial activities are considered within the collective evaluation of impairment and for the calculation of the portfolio provision.

Loans and receivables past due, individually impaired31.12.2017 31.12.2016(CZKm)

Default 3,350 3,257

Gross loans and receivables past due, individually impaired 3,350 3,257

Individual allowance for impairment for credit risks (904) (842)

Net loans and receivables past due, individually impaired 2,446 2,415

The table below summarizes the gross amount of individually impaired loans and advances to customers by business segment along with the fair value of related collateral held by the Bank as security.

31.12.2017 31.12.2016

(CZKm)

Individually impaired loans and advances

Financial effect of received collaterals

Individually impaired loans and advances

Financial effect of received collaterals

Corporate 2,501 1,620 2,074 1,569

Retail 849 399 1,183 641

Total 3,350 2,019 3,257 2,210

LOANS AND ADVANCES UNDER FORBEARANCE MEASURESThe Bank performs the restructuring of loans and advances in cases where according to the assessment of the current legal and financial situation of the client it would probably suffer a loss if the restructuring was not performed. The restructuring mainly includes a modification of the repayment schedule, adjustment of interest rates, forgiveness of past due interests or extending the payment of the principal or accessory amounts or transformation of an overdraft current account to a loan.


The evidence of loans and receivables under forbearance measures is as follows:

– Restructured loan continues to be recognized under the original loan number and the continuation of the allowance for impairment is maintained.

– Restructured loan is derecognized and new asset is recognized. The allowance for impairment is transferred from the derecognized loan to a newly recognized asset.

– Overdraft current account is transformed to a new installment loan and the respective allowance for impairment is transferred.

The allowance for impairment of loans under forbearance measures is calculated using the same methodology as for other loans and receivables.

In 2017, loans and advances of CZK 4,085 million (2016: CZK 2,084 million) were restructured. Out of these, there were CZK 3,777 million loans to Corporate customers and CZK 308 million loans to Retail customers (2016: Corporate customers – CZK 1,670 million; Retail customers – CZK 414 million).

The Bank maintains the evidence of loans and advances under forbearance measures and evaluates their status on a quarterly basis. Restructured loans and receivables are rated with grade 5c according to historical rating scale or grade 26 according to current rating scale.

Forborne loans and receivables according to degree of impairment:

As at 31.12.2017

(CZKm)Forborne loans and receivables

Received collateral

Loans and receivables to

customer – totalReceived collateral

Not impaired 2,174 488 58,328 35,081

Impaired 1,911 1,336 3,350 2,019

Gross loans and receivables 4,085 1,824 61,678 37,100

Allowance for impairment (436) 0 (1,195) 0

Net loans and receivables 3,649 1,824 60,483 37,100

As at 31.12.2016

(CZKm)Forborne loans and receivables

Received collateral

Loans and receivables to

customer – totalReceived collateral

Not impaired 148 120 53,498 31,539

Impaired 1,936 1,490 3,257 2,209

Gross loans and receivables 2,084 1,610 56,755 33,748

Allowance for impairment (250) 0 (1,142) 0

Net loans and receivables 1,834 1,610 55,613 33,748


The reconciliation from the opening balances to the closing balances of the forborne loans and receivables:

(CZKm)Retail

bankingCorporate

banking Total

As at 1.1.2016 423 275 698

New forborne receivables 100 1, 511 1, 611

Change in forborne receivables (repayments, increase) (90) (99) (189)

Reclassification 17 (17) 0

Written off forborne receivables (5) 0 (5)

Sale of forborne receivables (5) 0 (5)

Healed forborne receivables (26) 0 (26)

As at 31.12.2016 414 1,670 2,084

As at 1.1.2017 414 1,670 2,084

New forborne receivables 62 2,368 2 430

Change in forborne receivables (repayments, increase) (43) (180) (223)

Reclassification (17) 17 0

Written off forborne receivables (2) 0 (2)

Sale of forborne receivables (6) 0 (6)

Healed forborne receivables (100) (98) (198)

As at 31.12.2017 308 3,777 4,085

LOANS AND ADVANCES TO BANKSThe Bank has a portfolio of only properly repaid loans and advances to banks not impaired by individual or portfolio allowance.

For receivables from banks, the internal grade is derived from external ratings provided by recognized rating agencies.

Loans and advances to banks, individually not impaired31.12.2017 31.12.2016(CZKm)

Low Risk 1,892 1,923

Medium Risk 0 32

High Risk 0 0

Total 1,892 1,955


DEBT SECURITIESThe table below presents an analysis of debt securities by rating agency designation as at 31 December 2017 and 31 December 2016, based on Moody’s external ratings.

As at 31.12.2017(CZKm)


Investment securities Total

Aaa to A3 0 245 245

Baa1 to Baa3 0 0 0

Unrated 0 0 0

Total 0 245 245

As at 31.12.2016(CZKm)


Investment securities Total

Aaa to A3 0 245 245

Baa1 to Baa3 0 0 0

Unrated 0 0 0

Total 0 245 245

CONCENTRATION OF RISKS OF FINANCIAL ASSETS WITH CREDIT RISK EXPOSUREDiversification is one of the key principles in managing credit risk. The Bank fully adheres to regulatory limits for an exposure to single economically-linked groups of customers. The Bank applies a limit of EUR 150 million (CZK 3,831 million as of 31 December 2017) for the Sberbank group entities. The Bank applies the limit of 25% of regulatory capital for other economically linked groups of customers (CZK 2,080 million as of 31 December 2017). The Bank had receivables to six economically linked groups with exposure exceeding 10% of regulatory capital as of 31 December 2017 (seven as of 31 December 2016).


Additionally, the Bank places and monitors limits on the amount of risk accepted in relation to both geographical and industry sectors.

Geographical sectors

As at 31.12.2017

DomesticEuropean

UnionOther

Europe Other Total(CZKm)

Assets

Loans and advances to banks 28 1,407 383 74 1,892

Loans and advances to customers 53,642 6,372 387 82 60,483

from this forborne loans 1,617 2,032 0 0 3,649

Debt investment securities 245 0 0 0 245

Derivative financial instruments 15 214 20 0 249

Other financial assets 405 0 0 0 405

Total financial assets 54,335 7,993 790 156 63,274

As at 31.12.2016

DomesticEuropean

UnionOther

Europe Other Total(CZKm)

Assets

Loans and advances to banks 15 336 1,407 197 1,955


from this forborne loans 1,826 8 0 0 1,834

Debt investment securities 245 0 0 0 245


Other financial assets 426 0 0 0 426

Total financial assets 49,391 7,040 1,654 267 58,352


Industry sectors

As at 31.12.2017

Real estate

Trade and

services

Manu-factor-

ingHouse-

holds

Finan-cial

institu-tions

Public sector

Other indus-

tries Total(CZKm)

Assets

Loans and advances to banks 0 0 0 0 1,892 0 0 1,892

Loans and advances to customers 9,523 8,987 12,762 27,979 651 502 79 60,483

from this forborne loans 19 202 3,334 92 1 0 1 3,649

Investment securities 0 0 200 0 45 0 0 245

Derivative financial instruments 4 0 13 0 232 0 0 249

Other financial assets 1 36 -6 8 366 0 0 405

Total financial assets 9,528 9,023 12,969 27,987 3,186 502 79 63,274

As at 31.12.2016

Real estate

Trade and

services

Manu-factor-

ingHouse-

holds

Finan-cial

institu-tions

Public sector

Other indus-

tries Total(CZKm)

Assets

Loans and advances to banks 0 0 0 0 1,955 0 0 1,955

Loans and advances to customers 9,649 8,757 13,053 20,627 2,610 783 134 55,613

from this forborne loans 36 188 1,504 103 1 0 2 1,834

Investment securities 0 200 0 0 45 0 0 245

Derivative financial instruments 12 3 7 0 90 0 1 113

Other financial assets 6 12 0 0 408 0 0 426

Total financial assets 9,667 8,972 13,060 20,627 5,108 783 135 58,352

DERIVATIVESThe Bank maintains strict control limits on credit risk from derivative positions, by both amount and term. Credit risk exposure is expressed by a credit equivalent, which in relation to derivatives is only a small fraction of the derivative’s notional amount outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security which is required for credit transactions is obtained for credit risk exposures on these instruments.


FINANCIAL INSTRUMENTS SUBJECT TO OFFSETTING, ENFORCEABLE MASTER NETTING ARRANGEMENTS AND SIMILAR ARRANGEMENTSThe following table sets out the analysis of possible impact of enforceable master netting agreements to the Bank’s financial position.

31.12.2017

Gross amount

Gross amount netting

Net amount reported

Gross amounts – enforceable master netting agreements

(CZKm)Financial

instrumentFinancial collateral

Net amount

Assets

Derivatives 230 0 230 (50) (175) 5

Total Assets 230 0 230 (50) (175) 5

Liabilities

Derivatives 50 0 50 (50) 0 0

Total Liabilities 50 0 50 (50) 0 0

31.12.2016

Gross amount

Gross amount netting

Net amount reported

Gross amounts – enforceable master netting agreements

(CZKm)Financial

instrumentFinancial collateral

Net amount

Assets

Derivatives 89 0 89 (16) (72) 1

Total Assets 89 0 89 (16) (72) 1

Liabilities

Derivatives 16 0 16 (16) 0 0

Total Liabilities 16 0 16 (16) 0 0

CREDIT-RELATED COMMITMENTSThe primary purpose of these instruments is to ensure that funds are available to a customer as required. Payment guarantees and standby letters of credit with the characteristics of credit substitutes carry the same credit risk as loans. Documents and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.

Commitments represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to losses in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.


(c) Currency risk

The Bank defines currency risk as a risk of financial loss because of changes in foreign exchange rates.

The Bank takes on exposure resulting from fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank manages its open foreign exchange position using foreign exchange deals (spots and forwards). Foreign exchange derivatives made on behalf of clients are included in terms of accounting in the trading portfolio. The Management Board sets limits on the level of currency position by currency and in total for all currencies, which are monitored daily.

SENSITIVITY ANALYSISThe tables below summarize the Bank’s exposure to currency risk. It is expressed by the sensitivity analysis showing the effect of change in the CZK foreign exchange rate against significant currencies on the balance sheet, on the Bank’s annual net profit and other movements in equity.

In 2017, the effect of appreciation (+) / depreciation (-) in the CZK foreign exchange rate against the EUR by 10% and against USD by 20% was tested (in 2016: against the EUR by 10% and against USD by 20%) on the Bank’s annual net profit and other movements in equity.

In the Bank’s management judgment such an annual change in foreign exchange rates may be reasonably possible based on historical development. Included in the table are the respective changes in the Bank’s annual net profit and other movements in equity from assets and liabilities denominated in the above mentioned currencies.

The Bank has set limits on open currency positions in each currency. Within these limits, the Bank manages currency position so that it is balanced in all currencies (see the table Currency position). The impact of foreign exchange rate changes in net profit in the individual currencies, as well as in the aggregate for all currencies, is immaterial.

As at 31.12.2017 EUR USD

(CZKm) 10% -10% 20% -20%

Assets

Cash and balances with central banks (12) 12 (10) 10

Loans and advances to banks (144) 144 (13) 13

Loans and advances to customers (927) 927 (71) 71

Loans and receivables 0 0 0 0

Other assets (3) 3 0 0

Unsettled transactions with currency instruments (615) 615 (447) 447

(1,701) 1,701 (541) 541

Liabilities

Deposits from banks 347 (347) 0 0

Due to customers 637 (637) 390 (390)

Debt securities in issue 0 0 0 0

Subordinated debt 18 (18) 0 0

Other liabilities 14 (14) 3 (3)

Unsettled transactions with currency instruments 701 (701) 147 (147)

1,717 (1,717) 540 (540)

Total (annual net profit) 16 (16) (1) 1


Changes in the CZK foreign exchange rate against EUR and USD do not have any effect on the Bank’s movements in equity other than annual net profit.

As at 31.12.2016 EUR USD

(CZKm) 10% -10% 20% -20%

Assets

Cash and balances with central banks (13) 13 (11) 11

Loans and advances to banks (131) 131 (36) 36

Loans and advances to customers (992) 992 (80) 80

Loans and receivables 0 0 0 0

Other assets (3) 3 (2) 2

Unsettled transactions with currency instruments (205) 205 (422) 422

(1 344) 1 344 (551) 551

Liabilities

Deposits from banks 281 (281) 1 (1)

Due to customers 655 (655) 486 (486)

Debt securities in issue 0 0 0 0

Subordinated debt 19 (19) 0 0

Other liabilities 11 (11) 2 (2)

Unsettled transactions with currency instruments 376 (376) 59 (59)

1 342 (1 342) 548 (548)

Total (annual net profit) (2) 2 (3) 3

Changes in the CZK foreign exchange rate against the EUR and USD do not have any effect on the Bank’s movements in equity other than annual net profit.


CURRENCY POSITIONThe tables below summarize the Bank’s exposure to currency risk expressed by an open currency position. Included in the table are the Bank’s assets, liabilities and equity at carrying amounts, categorized by currency.

As at 31.12.2017

CZK EUR USD Other Total(CZKm)

Assets

Cash and balances with central banks 17,203 119 50 67 17,439



Investment securities 245 0 0 0 245

Other assets 1,377 27 1 0 1,405

69,669 10,857 468 470 81,464

Liabilities and equity

Deposits from banks 1,609 3,468 2 308 5,387

Due to customers 54,943 6,369 1,951 866 64,129

Debt securities in issue 1,914 0 0 0 1,914

Provisions 16 23 0 0 39

Subordinated debt 0 179 0 0 179

Other liabilities 893 141 16 12 1,062

Equity 8,754 0 0 0 8,754

68,129 10,180 1,969 1,186 81,464

Net assets/(liabilities and equity) 1,540 677 (1,501) (716) 0Net assets/(liabilities) from unsettled transactions with currency instruments including derivatives (1,374) (860) 1,500 733 (1)

Net open currency position 166 (183) (1) 17 (1)

As at 31.12.2017


Off-balance sheet items

Financial guarantees 706 842 3 356 1,907

Loan commitments and other credit related liabilities 4,961 959 8 0 5,928

Currency position from off-balance sheet items 5,667 1,801 11 356 7,835


As at 31.12.2016


Assets

Cash and balances with central banks 12,709 124 55 87 12,975

Loans and advances to banks 16 1 313 181 445 1,955


Investment securities 245 0 0 0 245

Other assets 1,139 27 11 0 1,177

59,315 11,385 646 619 71,965

Liabilities and equity

Deposits from banks 363 2,809 7 288 3,467

Due to customers 46,140 6,555 2 431 661 55,787

Debt securities in issue 3,262 0 0 0 3,262

Provisions 69 22 0 0 91


Other liabilities 537 110 9 183 839

Equity 8,330 0 0 0 8,330

58,701 9,685 2,447 1,132 71,965

Net assets/(liabilities and equity) 614 1 700 (1,801) (513) 0Net assets/(liabilities) from unsettled transactions with currency instruments including derivatives (534) (1,716) 1 811 524 86

Net open currency position 81 (16) 10 11 86

As at 31.12.2016


Off-balance sheet items



Currency position from off-balance sheet items 3,604 1,386 56 4 5,050


(d) Interest rate risk

The Bank defines interest rate risk as the risk of financial loss because of changes in market interest rates.

The Bank takes on exposure resulting from fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Bank exposure to interest rate risk is monitored daily using gap analysis in each foreign currency and is aggregated for all currencies. Sensitivity to changes in the market interest rate is regularly measured via a simulated change of the present value of the interest cash flows from individual interest rate instruments where the interest rate is increased by a standardized value of interest rate shock of 200 basis points (b. p.). Interest rate swaps or other fixed-rate instruments are used to manage interest rate positions.

SENSITIVITY ANALYSISThe table below summarizes the Bank’s exposure to interest rate risks. It is expressed by the sensitivity analysis showing the effect of a change in market interest rates by 100 b.p. on the Bank’s annual net profit and other movements in equity. The two week repo rate, which is a key interest rate for the CNB’s monetary policy, is usually changed several times a year. Having observed this rate’s average annual change over the last 5 years, in the Bank’s management judgment a noticeable change in annual market interest rates by 100 b.p. may reasonably be possible. Included in the table is the respective change in the Bank’s annual net profit and other movements in equity from:

• interest-bearing financial assets and liabilities at fair value through profit or loss and interest-bearing available-for-sale financial assets and

• loans and receivables, interest-bearing financial liabilities and held-to-maturity investments carried at amortized cost

As at 31.12.2017 100 b.p. (100 b.p.)

(CZKm) Annual net profit/loss

Assets

Cash and balances with central banks 160 (160)

Loans and advances to banks 18 (18)

Loans and advances to customers 251 (251)

Financial assets at fair value through profit and loss 0 0

Investment securities 2 (2)

432 (432)

Liabilities

Deposits from banks (51) 51

Due to customers (342) 342

Debt securities in issue (2) 2

Subordinated debt 0 0

(395) 395

Derivative financial instruments 41 (41)

Total 78 (78)


As at 31.12.2016 100 b.p. (100 b.p.)

(CZKm) Annual net profit/loss

Assets

Cash and balances with central banks 118 (118)

Loans and advances to banks 18 (18)

Loans and advances to customers 259 (259)

Financial assets at fair value through profit and loss 0 0

Investment securities 2 (2)

397 (397)

Liabilities

Deposits from banks (30) 30

Due to customers (293) 293

Debt securities in issue (6) 6

Subordinated debt 0 0

(329) 329

Derivative financial instruments 6 (6)

Total 73 (73)

Changes in the market interest rates do not have a material effect on the Bank’s movements in equity other than annual net profit.

(e) Liquidity risk

The Bank defines liquidity risk as the risk that difficulties in meeting obligations associated with financial liabilities are encountered, or the risk of losing the ability to finance assets.

The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees and from the settlement of derivatives. Liquidity risk management is based on both the planning of the cash inflows and cash outflows based on the remaining maturity of the assets and liabilities, and on the experience gained from progress analysis of the previous years. The Bank prepares a liquidity plan which is approved by the Management Board together with the business plan, and both these plans are closely interconnected.


CASH FLOWS FROM BALANCE SHEET FINANCIAL INSTRUMENTSThe table below presents the contractual undiscounted cash flows from the Bank’s financial liabilities as compared with total financial assets based on the remaining contractual period as at the statement of financial position date to the contractual maturity date.

As at 31.12.2017 Total

(CZKm)Within

3 months3–12

months1–5

yearsOver

5 yearsUndiscounted

cash flowsCarrying amount

Non-derivatives Financial liabilities

Deposits from banks 5,387 0 0 0 5,387 5,387

Due to customers 62,569 1,441 139 0 64,149 64,129

Debt securities in issue 0 886 1,044 0 1,930 1,914

Subordinated debt 0 0 0 219 219 179

Total Non-derivatives financial liabilities (remaining contractual maturities) 67,956 2,327 1,183 219 71,685 71,609

Total financial assets(remaining contractual maturities) 21,196 4,367 26,816 40,763 93,142 80,059

Net financial assets/(liabilities) (46,760) 2,040 25,633 40,544 21,457 8,450


(CZKm)Within

3 months3–12

months1–5

yearsOver

5 yearsUndiscounted

cash flowsCarrying amount

Non-derivatives Financial liabilities

Deposits from banks 3,096 371 0 0 3,467 3,467

Due to customers 53,865 1,709 235 0 55,809 55,787

Debt securities in issue 488 852 1,994 0 3,334 3,262

Subordinated debt 0 0 0 267 267 189

Total Non-derivatives financial liabilities (remaining contractual maturities) 57,449 2,932 2,229 267 62,877 62,705

Total financial assets(remaining contractual maturities) 16,733 4,851 25,238 36,777 83,599 70,788

Net financial assets/(liabilities) (40,716) 1 919 23,009 36,510 20,722 8,083

The negative net financial liability with a remaining maturity of less than three months is influenced by the fact that customers are strictly divided into maturity time bands according to their remaining contractual maturities (e.g. current accounts are contained within the “Within 3 months” column). However, as statistical evidence shows it is unlikely that a majority of those customers will actually withdraw their deposits from the Bank at contractual maturity.


CASH FLOWS FROM DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives settled on a net basisThe Bank’s derivatives to be settled on a net basis include interest rate swaps. The table below analyses contractual undiscounted cash flows from the Bank’s derivative financial liabilities settled on a net basis according to the remaining period as at the balance sheet date to the contractual maturity date.


(CZKm)Within

3 months3–12

months1–5

yearsOver

5 yearsUndiscounted

cash flowsNominal amount

Trading derivatives

– Interest derivatives

Interest rate swaps: assets 8 30 115 15 168 4,815

Interest rate swaps: liabilities 6 25 102 15 148 4,815

Hedging derivatives




Net financial assets/(liabilities) 11 (24) 91 0 78 0


(CZKm)Within

3 months3–12

months1–5

yearsOver

5 yearsUndiscounted


Trading derivatives




Net financial assets/(liabilities) 1 2 2 1 6 0


Derivatives settled on a gross basisThe Bank’s derivatives to be settled on a gross basis include foreign exchange forwards, foreign exchange swaps and foreign exchange options. The table below analyses contractual undiscounted cash flows from the Bank’s derivative financial instruments settled on a gross basis according to the remaining period as at the statement of financial position date to the contractual maturity date.


(CZKm)Within

3 months3–12

months1–5

yearsOver

5 yearsUndiscounted


Trading derivatives

– Foreign exchange derivatives

Outflow 6,851 3,911 1,974 0 12,737 12,737

Inflow 6,866 3,888 1,981 0 12,735 12,735


(CZKm)Within

3 months3–12

months1–5

yearsOver

5 yearsUndiscounted


Trading derivatives

– Foreign exchange derivatives

Outflow 5,955 185 226 0 6,366 6,366

Inflow 6,036 187 230 0 6,453 6,453

OFF-BALANCE SHEET ITEMSThe table below analyses the off-balance sheet items of the Bank exposed to a liquidity risk into relevant maturity bands based on the remaining period as at the balance sheet date to the contractual maturity date.

As at 31.12.2017

(CZKm)Within

3 months3–12

months1–5

yearsOver

5 years Total



Total 6,575 595 552 113 7,835

As at 31.12.2016

(CZKm)Within

3 months3–12

months1–5

yearsOver

5 years Total



Total 4,201 432 362 55 5,050

Future minimum lease payments under operating lease commitments are analyzed in Note 30.


DEPOSITS CONCENTRATIONThe following table presents the concentration of depositors with the 10 largest deposits from non-financial clients. The ratio represents the share of deposits volume collected with such clients and the volume of total deposits from non-financial clients:

As at 31 December 2017 11.85%As at 31 December 2016 10.35%

(f) Operational risk

The Bank defines operational risk as the risk of a financial loss resulting from inadequate or failed internal processes, people and systems or from external factors including legal risks. In cases of the breakdown of business processes it also includes reputational risk. The Bank defines legal risk, compliance risk, operational risk, IT risk, cyber risk and outsourcing risk and subcategories of the operational risk.

In accordance with CNB measures, the Bank has an internal database of requisite regulations for operational risk management, including those for the areas of information security, continuity of operations or internal control systems. The Bank has also established an internal control system of individual processes, which is one of the fundamental elements of operational risk management. The operational risk management process includes the identification, collection and recording of operational risk events, evaluation and valuation, measures and risk minimization, along with controlling the implementation of the designed measures and their effectiveness. Every identified operational risk event is analyzed and considered individually and the measures to be taken are designed not only in accordance with the frequency of occurrence and amount of realized / forecasted / potential loss, but also with respect to its character and reason for occurrence. The aim is to introduce such measures that effectively minimize or eliminate the probability of subsequent occurrence of the risk event. The implementation of suggested measures is periodically reviewed.

Regular assessment and valuation of operational risk is used by the Bank (Risk Self-Assessment). This process is running on the level of actually recorded events and on the level of hypothetical risks.

Operational risk management is performed in close co-operation with the Bank’s parent company. The Bank applies a standardized method for calculating the capital requirement for operational risk.

(g) Regulatory capital management

The regulatory capital management process is coordinated within the Sberbank Group in close communication with the Bank’s shareholder. It is aimed at:

• ensuring the Bank’s long-term stability in relation to existing risks;

• compliance with the supervisory capital requirements (capital adequacy); and

• maintaining a strong capital base to support business expansion

The Bank fulfils the requirement of CNB Decree No. 163/2014 (“the Decree“), the European Parliament and European Commission Directive No. 575/2013 and Act No. 21/1992 on banks for ongoing compliance with the capital adequacy limit by daily monitoring of risk-weighted assets. Required regulatory capital adequacy reports are filed with the CNB on a monthly basis. The Bank also informs the parent company on the level of compliance with the regulatory capital requirements with the same frequency.

The methodology for the calculation of regulatory capital is defined by the Decree. The Bank ensures that the capital level exceeds regulatory capital requirements in coordination with the parent company.


The Bank estimates capital requirements for coverage of individual risks in compliance with the valid regulatory legislation.

Additionally, the Bank’s internal capital adequacy assessment system ensures that internally determined capital resources exceed the internally assessed capital required.

The table below summarizes the composition of the Bank’s regulatory capital and risk-weighted assets. During both years, the Bank complied with the regulatory capital adequacy limit of 10.5%.

(CZKm) 31.12.2017 31.12.2016

Tier 1

Share capital (net of treasury shares) 2,806 2,806

Share premium account 4,015 4,015

Obligatory reserve funds 166 152

Retained earnings from previous period 1,343 1,085

Usable interim profit 290 0

Less: Intangible assets other than goodwill (477) (268)

Other deductible items 0 0

Tier 1 capital 8,143 7,791

Tier 2

Subordinated debt A 179 189

Tier 2 capital 179 189

Total regulatory capital 8,322 7,980

Risk-weighted assets

Credit risk in investment/banking portfolio 47,117 44,949

Credit risk in trading portfolio 184 0

General interest rate risk 0 0

Operational risk 3,331 3,255

Total risk-weighted assets 50,632 48,204

Capital adequacy 16.44% 16.55%


(h) Maturity analysis of assets and liabilities

The table below analyses assets and liabilities and summarizes the composition of the Bank’s capital and risk-weighted assets according to when they are expected to be settled or recovered:

As at 31.12.2017 Within 12 months

After 12 months Total(CZKm)

ASSETS

Cash and balances with central banks 17,439 0 17,439

Loans and advances to banks 1,833 59 1,892


Changes in the fair value of the portfolio of hedged instruments (70) 0 (70)









Total assets 33,497 47,967 81,464

LIABILITIES

Deposits from banks 5,387 0 5,387

Due to customers 29,208 34,921 64,129



Debt securities in issue 866 1,048 1,914

Current income tax liability 47 0 47



Provisions 4 35 39


Total liabilities 36,527 36,183 72,710


As at 31.12.016 Within 12 months

After 12 months Total(CZKm)

ASSETS

Cash and balances with central banks 12,975 0 12,975

Loans and advances to banks 1,752 203 1,955









Total assets 28,918 43,047 71,965

LIABILITIES

Deposits from banks 3,467 0 3,467

Due to customers 25,013 30,774 55,787


Debt securities in issue 1,304 1,958 3,262

Current income tax liabilities 28 0 28



Provisions 47 44 91


Total liabilities 30,670 32,965 63,635


34 Fair Value of Financial Assets and LiabilitiesThe following table summarizes the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s balance sheet at their fair value. Segments Corporate/Retail are determined in accordance with the Basel III standardized approach.

Fair value of financial assets and liabilitiesAs at 31.12.2017

(CZKm) Level 1 Level 2 Level 3Fair value

totalCarrying amount

Financial assets


Loans and advances to customers thereof: 0 0 57,836 57,836 60,483

Retail 0 0 33,087 33,087 35,139

Corporate 0 0 24,749 24,749 25,344

Securities in category loans and receivables 0 0 245 245 245

Financial liabilities

Deposits from banks 0 5,388 0 5,388 5,387

Due to customers thereof: 0 31,475 32,663 64,138 64,129

Retail 0 26,651 22,993 49,644 49,635

Corporate 0 4,824 9,670 14,494 14,494

Debt securities in issue thereof: 0 0 1,913 1,913 1,914

Retail 0 0 7 7 7

Corporate 0 0 1,906 1,906 1,907

Subordinated Debt 0 0 221 221 179


Fair value of financial assets and liabilitiesAs at 31.12. 2016

(CZKm) Level 1 Level 2 Level 3Fair value

totalCarrying amount

Financial assets

Loans and advances to banks 0 1,956 0 1,956 1,955

Loans and advances to customers thereof: 0 0 56,329 56,329 55,613

Retail 0 0 29,962 29,962 29,503

Corporate 0 0 26,367 26,367 26,110

Securities in category loans and receivables 0 0 245 245 245


Deposits from banks 0 3,473 0 3,473 3,467

Due to customers thereof: 0 30,685 25,131 55,816 55,787

Retail 0 27,003 20,010 47,013 46,991

Corporate 0 3,682 5,121 8,803 8,796

Debt securities in issue thereof: 0 0 3,319 3,319 3,262

Retail 0 0 0 0 0

Corporate 0 0 3,319 3,319 3,262

Subordinated Debt 0 0 264 264 189

The following methods and assumptions were used in estimating the fair values of the Bank’s financial assets and liabilities:

LOANS AND ADVANCES TO BANKSThe carrying amounts of current account balances and loans with maturity less than one month are, by definition, equal to their fair values. The fair values of term placements with banks are estimated by discounting their future cash flows using current inter-bank market rates irrespective of credit spread. A majority of the loans and advances re-price within relatively short time spans; therefore, it is assumed their carrying amounts approximate their fair values.

LOANS AND ADVANCES TO CUSTOMERSThe fair value of loans to customers with defined future contractual cash-flows are estimated by discounting their future cash flows using current market rates adjusted for appropriate risk premium that is actually valid for the respective loan at the date of the fair value calculation. For loans without explicitly defined future contractual cash-flows (e.g. overdrafts) the Bank assumes that fair-value is close to the carrying amount. For loans impaired with individual loan loss provision calculated according discounted estimated cash-flows the Bank assumes that fair-value is close to carrying amount decreased by the loan loss provision created.

INVESTMENT SECURITIESFor investment securities in the category loans and receivables the Bank assumes that the fair-value approximates their carrying amount.


DEPOSITS FROM BANKSThe carrying amounts of current account balances and deposits with maturity less than one month are, by definition, equal to their fair values. For other amounts due to banks with equal to or less than one year remaining maturity, it is assumed their carrying amounts approximate their fair values. The fair values of other amounts due to banks are estimated by discounting their future cash flows using current inter-bank market rates irrespective of own credit spread.

DUE TO CUSTOMERSThe fair values of current accounts as well as term deposits with equal to or less than one year remaining maturity approximate their carrying amounts. The fair values of other term deposits are estimated by discounting their future cash flows using rates currently offered for deposits of similar remaining maturities irrespective of their own credit spread.

DEBT SECURITIES IN ISSUEMortgage bonds issued are not publicly traded and their fair values are based upon the quoted market prices of the debt securities with similar characteristics. The carrying amounts of promissory notes and certificates of deposit approximate their fair values. Their own credit spread is not considered.

FAIR VALUE HIERARCHYThe table below analyses financial instruments measured at fair value at the end of the reporting period. Information about fair value measurements are disclosed using a hierarchy that reflects the significance of inputs used in measuring the fair values of financial instruments (they are categorized into three levels):

• Level 1 – fair value measurements using quoted prices (unadjusted) in active markets for identical assets and liabilities.

• Level 2 – fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active, or other valuation techniques in which significant inputs are directly or indirectly observable from market data.

• Level 3 – fair value measurements using inputs for the asset or liability that are not based on observable market data (i.e., unobservable inputs) and these data have significant influence on the measurement. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The Bank has an established control framework with respect to the measurement of fair values of assets and liabilities. These controls include the verification of observable pricing, re-performance of model valuations, a review and approval process for new models and changes to models, quarterly calibration and back-testing of models against observed market transactions, analysis and investigation of significant daily valuation movements and review of significant unobservable inputs, valuation adjustments and significant changes to the fair value measurement of Level 3 instruments.

As at 31.12.2017Level 1 Level 2 Level 3 Total(CZKm)

Financial assets

Derivative financial instruments 0 192 0 192

Derivative financial instruments to hedge interest rate risk 0 57 0 57



Derivative financial instruments to hedge interest rate risk 0 2 0 2

In 2017, there were no transfers of financial assets or liabilities between Level 1 and 2.


As at 31.12.2016Level 1 Level 2 Level 3 Total(CZKm)

Financial assets




In 2016, there were no transfers of financial assets or liabilities between Level 1 and 2.

35 DividendsFinal dividends are not accounted for until they have been ratified at the Annual General Meeting. No dividends for the years 2012, 2013, 2014, 2015 and 2016 have been paid. At the Annual General Meeting held on 26 April 2017 it was approved to allocate retained earnings without dividend payments and to create reserve funds.

Distribution of the net profit after tax for 2016 272

Transfer to reserve funds 14

Transfer to retained earnings 258

Dividends to shareholders 0

36 ShareholdersThe shareholder structure of the Sberbank CZ as at 31 December 2017 was as follows:

Voting shareholdersShare in %Name and registered office

Sberbank Europe AG, Schwarzenbergplatz 3, Vienna (formerly Volksbank International AG) 100.00

100.00

The shareholder structure of the Sberbank CZ as at 31 December 2016 was as follows:

Voting shareholdersShare in %Name and registered office

Sberbank Europe AG, Schwarzenbergplatz 3, Vienna (formerly Volksbank International AG) 100.00

100.00


37 Related PartiesThe ultimate parent company is Sberbank RU. The parent company Sberbank Europe AG (formerly Volksbank International AG) and companies within Sberbank Group other than the parent company are part of Other related parties.

The amounts of the income, expense and assets and liabilities balances regarding related parties were as follows:

As at 31.12.2017 and year then ended

NoteUltimate

ParentManage-

ment

Other relatedparties Total(CZKm)

Interest income 3 5 0 1 6

Commission and fee income 4 0 0 1 1

Net trading income 5 1 0 0 1

Other operating income 8 0 0 23 23

Interest expense 3 1 0 7 8

Commission and fee expense 4 0 0 3 3

Administrative expense 7 4 95 22 121

Due from banks 12 307 0 254 561

Loans and advances 13 0 27 0 27


Other assets 21 0 0 1 1

Due to banks 22 1,538 0 1,713 3,251

Due to customers 23 0 17 0 17




Guarantees granted and commitments given 29 1 1 0 2

Guarantees granted and commitments received 1,155 0 1,052 2,207

Assets under custody 0 1 0 1


As at 31.12.2016 and year then ended

NoteUltimate

ParentManage-

ment

Other relatedparties Total(CZKm)

Interest income 3 5 0 0 5

Commission and fee income 4 0 0 1 1

Other operating income 8 0 0 29 29

Commission and fee expense 4 0 0 13 13

Net trading income 5 15 0 38 53

Administrative expense 7 6 83 40 129

Due from banks 12 1,274 0 110 1,384

Loans and advances 13 0 19 0 19


Due to banks 22 152 0 481 633

Due to customers 23 0 12 0 12




Guarantees granted and commitments given 29 66 0 0 66

Guarantees granted and commitments received 1,263 0 1,250 2,513

Assets under custody 0 2 0 2

Loans and advances to customers and individuals include the following receivables from related parties (Note 13):

Receivables from related parties31.12.2017 31.12.2016(CZKm)

Management of the Bank 9 6

Members of Supervisory Board and Management Board 18 13

Total receivables from related parties 27 19

In the opinion of the management, all receivables from related parties were made in the ordinary course of business on substantially the same terms and conditions, including interest rates, as those prevailing at the same time for comparable transactions with other customers, and did not involve more than the normal credit risk or present other unfavorable features.


Due to customers includes the following position with related parties:

Deposits from related parties31.12.2017 31.12.2016(CZKm)

Management of the Bank 11 8

Members of Supervisory Board and Management Board 6 4

Deposits from related parties 17 12

Due to banks includes the following position with related parties:

Deposits from related parties31.12.2017 31.12.2016(CZKm)

Sberbank Moscow 1,538 152

Sberbank Europe AG 894 193

Other related parties (banks in the group) 819 288

Deposits from related parties 3,251 633

It is the management’s opinion that deposits from related parties were accepted on substantially the same terms and conditions, including interest rates, as those prevailing at the same time for comparable transactions with other customers, and did not involve more than the normal interest rate and liquidity risk or present other unfavorable features (Note 22 and 23).

Key management personnel salaries, benefits and contributions paid:

(CZKm) 31.12.2017 31.12.2016

Short-term employee benefits 93 83

Termination benefits 2 0

Salaries and bonuses of senior management and Supervisory Board mem-bers 95 83

Other personnel expenses are disclosed in Note 7.

38 Subsequent EventsVladimír Šolc was acting as a Chairman of the Management Board until 31 January 2018. Edin Karabeg was appointed as a new Chairman of the Management Board on 26 March 2018.

There were no other important events which have occurred subsequent to the year-end until the date of preparation of the financial statements and which would have other material impact on the financial statements of the Bank as at 31 December 2017 or would have to be presented in the Notes to the financial statements of the Bank as at 31 December 2017.

SBERBANK CZ | ANNUAL REPORT 2017QUANTITATIVE INDICES136

The method used for the calculation of quantitative indices is described and explained in Chapter 17, Alternative Performance Indicators.

CZK thousand 2017 2016 2015 2014 2013 2012

Return on average assets (ROAA) 0.54% 0.37% 0.03% 0.55% 0.35% 0.37%

Return on average Tier 1 equity (ROAE) 5.31% 3.47% 0.29% 5.61% 4.48% 4.20%

Assets per employee 89,129 85,673 90,555 81,043 98,014 91,784

Administrative costs per employee 1,591 1,664 1,630 1,544 1,513 1,392

Net profit per employee 464 324 27 464 320 313

Capital structure

Tier 1 8,142,938 7,790,782 7,882,836 7,550,114 5,187,228 4,982,605

Paid-up share capital 2,805,990 2,805,990 2,805,990 2,805,990 2,005,380 2,005,380

Paid up share premium 4,015,635 4,015,635 4,015,635 4,015,635 2,694,628 2,694,628

Legal reserve funds 165,735 152,134 150,996 131,861 120,369 109,902

Retained earnings from previous years 1,343,477 1,085,053 1,063,418 699,689 481,523 282,636

Usable interim profit 290,000 0 0 0 0 0

Tier 2 178,780 189,140 0 15,032 2,229,653 150,840

Provisions for general risks

Deductible items (477,899) (268,030) (153,202) (103,240) (114,672) (109,941)

Intangible assets (477,463) (267,887) (151,914) (100,305) (114,672) (109,941)

Capital 8,321,718 7,979,922 7,882,836 7,565,146 7,416,880 5,133,445

Capital requirements

Total capital requirements relating to credit risk 3,769,348 3,595,457 3,352,336 3,496,067 3,545,617 3,277,445

Total capital requirements relating to operational risk 266,461 260,390 253,440 230,927 216,979 210,067

Total capital requirements relating to currency risk 14,745 0 0 0 0 0

Capital adequacy 16.44% 16.55% 17.49% 16.21% 15.77% 11.78%

19. QUANTITATIVE INDICES

SBERBANK CZ | ANNUAL REPORT 2017CAPITAL REQUIREMENTS 137

2017 2016

CZK thousand ExposureCapital

requirement ExposureCapital

requirement

Exposures to regional governments or local authorities 213,965 17,117 252,800 20,224

Exposures to public sector entities 79 6 200 16

Exposures to institutions 577,661 46,213 349,204 27,936

Exposures to corporates 23,895,700 1,911,656 25,865,543 2,069,243

Retail exposures 11,142,625 891,410 8,671,107 693,689

Exposures secured by mortgages on immovable property 6,651,752 532,140 5,360,258 428,821

Exposures in default 3,272,627 261,810 3,381,763 270,541

Exposures associated with particularly high risk 425,459 34,037 300,939 24,075

Other items 923,831 73,906 761,394 60,912

20. CAPITAL REQUIREMENTS

138

The Management Board of Sberbank CZ, a.s., submits, for the accounting period from 1 January 2017 to 31 December 2017, the following Report on Relationships between the Related Entities in accordance with Section 82 et seq. of Act No. 90/2012 Coll. on business corporations.

1) Controlled entity

Sberbank CZ, a.s., Co. Reg. No. 250 83 325, with its registered office at U Trezorky 921/2, Jinonice, 158 00 Prague 5, Czech Republic, entered in the Commercial Register kept by the Municipal Court in Prague, Section B, Insert 4353(“Sberbank CZ” or the “Bank”)

2) Controlling entity

The sole shareholder of Sberbank CZ is the company Sberbank Europe AG with its registered office at Schwarzenbergplatz 3, 1010 Vienna, Austria (“Sberbank Europe”). Sberbank Europe is an entity directly controlling Sberbank CZ.

Sberbank of Russia, with its registered office at 19 Vavilova St., 117997 Moscow, Russian Federation (“Sberbank of Russia”) is an entity indirectly controlling Sberbank CZ through Sberbank Europe.

More than 50% of Sberbank of Russia is owned by the Central Bank of the Russian Federation, the rest is owned by persons, and none of them, even together with persons in concert, owns more than 25% of voting rights, owns a share in its registered capital of more than 25%, is the beneficiary of at least 25% of profit, and controls Sberbank of Russia pursuant to provisions of Section 4(4)(a) points 1, 2, 3 of Act No. 253/2008 Sb., on selected measures against legitimisation of proceeds of crime and financing of terrorism (the “AML Act”). Pursuant to Section 4(4)(a) point 4 of the AML Act, natural persons who are factually or legally able to exercise directly or indirectly a controlling influence in Sberbank CZ, a.s. shall be members of the governing body of Sberbank CZ, a.s.

3) The structure of relationships between the controlling entity and the controlled entity and between the controlled entity and the entities controlled by the same controlling entity, the role of the controlled entity

Sberbank CZ is a joint-stock company incorporated under Czech law that operates on the Czech market as an independent bank pursuant to Act No. 21/1992 Coll. on banks. The Bank provides financial services in accordance with its line of business.

Sberbank CZ is part of the international financial group Sberbank Group headed by Sberbank of Russia. Sberbank of Russia owns a number of companies, a list of which is available on the website of Sberbank of Russia as well as in the annual report of Sberbank of Russia. Sberbank of Russia operates mainly in Central and Eastern Europe (Sberbank Europe), Kazakhstan (Subsidiary Bank Sberbank JSC), the Ukraine (SBERBANK PJSC), Belarus (BPS-Sberbank OJSC), Turkey (DenizBank A.S.) and Switzerland (Sberbank Switzerland AG). It also has representatives in Germany and China and a branch in India.

The structure of relationships between the related entities within the group Sberbank Group is listed in Annex 1 to this report. This structure shows the mutual relationships between individual related entities within the group. The structure shows the status as of 31 December 2017.

Other entities controlled by the same (directly and indirectly) controlling entity with which Sberbank CZ maintains regular mutual relationships are, in particular, the following entities:Sberbank banka d.d., Sberbank Magyarország Zrt., Sberbank a.d. BL, Sberbank Srbija a.d., Sberbank BH d.d., Sberbank d.d. and ALB EDV-Service GmbH.

PJSC VS Bank was also an entity controlled by the same controlling entity; however, the ownership interest of Sberbank Europe was sold at the end of 2017 and this company ceased to be part of the Sberbank Group.

21. REPORT ON RELATIONSHIPS

SBERBANK CZ | ANNUAL REPORT 2017REPORT ON RELATIONSHIPS

139

Sberbank CZ does not control or mediate the control of another entity.

4) Manner and means of controlling

The control is exercised mainly through decisions of the sole shareholder exercising the powers of the General Meeting (e.g. through an amendment to the Articles of Association) and through members in the bodies Sberbank CZ, a.s., i.e. the supervisory board and the audit committee (e.g. the Supervisory Board appoints and dismisses members of the Board of Sberbank CZ, a.s.).

Sberbank Europe exercises its shareholder rights in accordance with the Articles of Association of Sberbank CZ and the applicable laws and regulations.

5) Overview of acts performed at the initiative or in the interest of the controlling entity or the entities controlled by it if such acts related to assets exceeding 10% of the equity of the controlled entity established according to the last financial statements

In 2017, Sberbank CZ neither adopted nor performed any legal acts relating to assets exceeding 10% of the equity of the controlled entity identified by the last financial statements, at the initiative or in the interest of the related entities.

6) Overview of mutual agreements between the controlled entity and the controlling entity or between the controlled entities

Below is the list of the most important contracts and agreements concluded between the related entities and effective in 2017:

Name of the contract Subject-matter of the contractPerformance provider

Performance recipient

Market conditions

Contract “Sublicensing Murex – Order + Acceptance”

Provision of the sub-licence for the Murex software Sberbank Russia Sberbank CZ Standard

Contract “Sublicensing QRIC – Order + Acceptance”

Provision of the sub-licence for the QRIC software Sberbank Russia Sberbank CZ Standard

Contract “Licence order (ORACLE)”

Provision of licence and support for the Oracle software Sberbank Russia Sberbank CZ Standard

Annexes 1 to 8 and 10 to 13 to the contract “Licence order (ORACLE)”

Specific conditions for the provision of and support for the Oracle software

Sberbank Russia Sberbank CZ Standard

Agreement – “Non-Disclosure Agreement”

Arrangement on the obligation to maintain confidentiality regarding proprietary information under the cooperation


Agreement “Data Transfer Agreement”

Determination of the conditions for processing of the personal data of data subjects


Agreement “Sublicensing agreement”

Provision of the sub-licence for the Oracle software Sberbank Russia Sberbank CZ Standard

Agreement for the Provision of Services

Provision of services of the data centre (the use and operation of technical equipment server + software)


Contract “Sublicensing Mercury – Order + Acceptance”

Provision of the sub-licence for the Mercury software Sberbank Russia Sberbank CZ Standard

Contract “Sublicensing Zeus – Order + Acceptance”

Provision of the sub-licence for the Zeus software Sberbank Russia Sberbank CZ Standard

Agreement “Connection Agreement No. 40 (FPSU tokens)”

Provision of services – secure VPN network Sberbank Russia Sberbank CZ Standard

Contract “Microsoft Unlimited Contract”

Provision of the sub-licence for the Microsoft software Sberbank Russia Sberbank CZ Standard


140



Market conditions

Annex 4 to the “Microsoft Unlimited Contract”

Specific conditions of the provision of the sub-licence for the Microsoft software (including renewal)


Agreement “Connection Agreement No. 30 (FPSU Unit)”

Provision of services – secure VPN network Sberbank Russia Sberbank CZ Standard

Annexes 1 to 2 to “Connection Agreement No. 30 (FPSU Unit)”

Acknowledgement of receipt of equipment for the implementation of the provision of services


Agreement “Computer Programme Sublicensing Agreement”

Provision of the sub-licence and support for the software (computer programs)


Annexes 1 and 2 to the Agreement “Computer Programme Sublicensing Agreement”

Specific conditions of the provision of the sublicence and software support (including renewal)


Master Agreement “ISDA – Master Agreement, Schedule, CSA”

Determination of the framework conditions for OTC derivative transactions

Sberbank Russia Sberbank CZStandard

Sberbank CZ Sberbank Russia

Annex to the master agreement entitled “ISDA – Master Agreement – Credit Support Annex”

Specification of the framework conditions for OTC derivative transactions



Amendment “ISDA VM Credit Support Annex”

Changing the conditions for OTC derivative transactions



Master Agreement “GMRA Master Agreement”

Determination of the framework conditions for repo transactions



Master Agreement “ISDA – Master Agreement, Schedule, CSA”


Sberbank Europe Sberbank CZStandard

Sberbank CZ Sberbank Europe



Sberbank Europe Sberbank CZStandard

Sberbank CZ Sberbank Europe

Master Agreement “Master Agreement on Personnel Lease”

Negotiation of the framework conditions for the lease of the workforce (employees of Sberbank CZ for the activities of Sberbank Europe)

Sberbank CZ Sberbank Europe Standard

Master Agreement “Master Agreement on Personnel Lease”

Negotiation of the master conditions for the lease of the workforce (employees of Sberbank Europe AG for the activities of Sberbank CZ)

Sberbank Europe Sberbank CZ Standard

Master Agreement “Master Agreement on Virtual and Partial Personnel Lease”

Negotiation of the framework conditions for the lease of the workforce (employees of Sberbank CZ for the activities within Sberbank Europe including Sberbank Group)


Annex to the “Master Agreement on Virtual and Partial Personnel Lease”

Negotiation of the lease of the workforce under a master agreement


Agreement “Subordinated Term Loan Agreement”

Determination of the conditions for drawing a subordinated debt Sberbank Europe Sberbank CZ Standard

Amendment “Amendment no. 1 to Subordinated Term Loan Agreement”

Amendment to the conditions for drawing a subordinated debt Sberbank Europe Sberbank CZ Standard


141



Market conditions

Amendment “Amendment no. 2 to Subordinated Term Loan Agreement”

Amendment to the conditions for drawing a subordinated debt Sberbank Europe Sberbank CZ Standard

Agreement “Agreement on the provision of services”

adjusting conditions for the provision of services Sberbank Europe Sberbank CZ Standard

Master Agreement “Master Agreement – Granting SW Licences and Services”

Determination of the master conditions for the provision of the licence and support for software (individual software listed in the appendices to the Master Agreement)


Annexes 1 to 2 to the Master Agreement “Granting of Licence – Midas”

Provision of licence and support for the Midas software Sberbank Europe Sberbank CZ Standard

Master Agreement “Master Agreement for Granting of Software licences and services”

Determination of the master conditions for the provision of licence and support for software (Thomson Reuters – software for trading on markets)


Agreement “Services Agreement – Strategy Reporting Center”

Provision of services (designing credit strategies and policies for the approval process of retail products)


Master Agreement “Master Services Agreement”

Determination of the master conditions for the provision of services (Underwriting HUB – submitting UW opinions on business transactions)


Annexes 1 to 7 to the Master Agreement “Master Services Agreement”

Specific conditions for Underwriting HUB Sberbank CZ Sberbank Europe Standard

Contract “Contract on the Confidentiality of Protected Information”

Arrangement on the obligation to maintain confidentiality regarding proprietary information


Master agreement “Master Participation Agreement”

determining framework conditions for mutual cooperation in the provision of financial transactions


Contract “Audit Group Contract” Group audit regulation Sberbank Europe Sberbank CZ Standard

Master Agreement “Master Services Agreement”

Determination of the master conditions for the provision of services (Underwriting HUB – submitting UW opinions on business transactions)

Sberbank CZ Sberbank banka d.d. Standard

Annexes 1 to 2 to the Master Agreement “Master Services Agreement”

Specific conditions for Underwriting HUB Sberbank CZ Sberbank banka

d.d. Standard

Master Agreement “ISDA – Master Agreement, Schedule, CSA – Slovenia”


Sberbank banka d.d. Sberbank CZ

StandardSberbank CZ Sberbank

banka d.d.



Sberbank banka d.d. Sberbank CZ


banka d.d.

Master Agreement “ISDA – Master Agreement, Schedule, CSA – Banja Luka”


Sberbank a.d. Banja Luka Sberbank CZ

StandardSberbank CZ Sberbank a.d.

Banja Luka


142



Market conditions



Sberbank a.d. Banja Luka Sberbank CZ

StandardSberbank CZ Sberbank a.d.

Banja Luka

Master Agreement “ISDA – Master Agreement, Schedule, CSA – Serbia”


Sberbank Srbija a.d. Sberbank CZ

StandardSberbank CZ Sberbank Srbija

a.d.



Sberbank Srbija a.d. Sberbank CZ


Srbija a.d.

Master Agreement “ISDA – Master Agreement, Schedule, CSA – Bosnia and Herzegovina”


Sberbank BH d.d., Sarajevo Sberbank CZ

StandardSberbank CZ Sberbank BH d.d.,

Sarajevo



Sberbank BH d.d., Sarajevo Sberbank CZ

StandardSberbank CZ Sberbank BH d.d.,

Sarajevo

Master Agreement “ISDA – Master Agreement, Schedule, CSA – Hungary”


Sberbank Magyarország Zrt. Sberbank CZ


Magyarország Zrt.



Sberbank Magyarország Zrt. Sberbank CZ


Magyarország Zrt.

Agreement “Service Agreement Consolidated with Amendments”

Determination of the conditions for the provision of services (Underwriting HUB – submitting UW opinions on business transactions)

Sberbank CZ Sberbank Magyarország Zrt. Standard

Annexes 1 to 3 to the “Service Agreement consolidated with amendments”

Specific conditions for Underwriting HUB Sberbank CZ Sberbank

Magyarország Zrt. Standard

Master Agreement “ISDA – Master Agreement, Schedule, CSA – Croatia”


Sberbank d.d. Sberbank CZStandard

Sberbank CZ Sberbank d.d.



Sberbank d.d. Sberbank CZStandard

Sberbank CZ Sberbank d.d..

Master Agreement “Master Agreement”

Determination of the conditions for the provision of services (Underwriting HUB – submitting UW opinions on business transactions)

Sberbank CZ Sberbank d.d. Standard

Annexes 1 to 5 to the Master Agreement “Master Agreement”

Specific conditions for Underwriting HUB Sberbank CZ Sberbank d.d. Standard

Master Agreement “Master Agreement No. 01-1.12/2/2015”

Determination of the master conditions for the provision of technological support

Sberbank Technologies Minsk (Controlled entity Sberbank of Russia)

Sberbank CZ Standard


143



Market conditions

Agreement “Non-Disclosure Agreement No. NDA-01-1-12/2/2015”

Arrangement on the obligation to maintain confidentiality regarding proprietary information under the cooperation

Sberbank Technologies Minsk (Controlled entity Sberbank of Russia)

Sberbank CZ Standard

Agreement “Guarantee Agreement”

Surety for the loan provided to Safina Sberbank Russia Sberbank CZ Standard

Agreement “Guarantee and Indemnity”

Guarantee to cover potential losses as a result of what is known as the “haircut” in the real property value for the selected loan transactions


Agreement for the Provision of IT Services

adjusting conditions for the provision of IT services ALB-EDV GmbH Sberbank CZ Standard

Licence Agreement Provision of a software sub-licence ALB-EDV GmbH Sberbank CZ Standard

The legal predecessor of Sberbank CZ is Volksbank CZ, a.s. (“Volksbank CZ”). The name of the business was changed on 28 February 2013. Sberbank CZ as the legal successor acquired as a result of the acquisition all the rights and obligations of Volksbank CZ, including the contractual relationships arising from validly concluded contracts. And, therefore, the list of contracts above does not distinguish between Sberbank CZ and Volksbank CZ.

On 29 July 2016, Penta Investments became the majority shareholder of Sberbank Slovensko, a.s. The sale of Sberbank Slovensko, a.s. resulted in 2016 in the termination of a series of contracts and agreements concluded between Sberbank CZ and Sberbank Slovensko, a.s., in particular relating to the cooperation in the field of Underwriting HUB. One agreement concluded between Sberbank CZ and Sberbank Slovensko, a.s. is still in force (e.g. Agreement “ISDA 2002 Master Agreement”) but performance under this was no longer being carried out at the end of 2017.

One-off contracts and agreement with insignificant performance concluded with Sberbank Europe, Sberbank of Russia, as well as other related parties are not mentioned.

Sberbank CZ and Sberbank of Russia enter, on a continuous basis and under standard market conditions, into other relationships as follows:(a) relationships regarding interbank deposits, for which Sberbank CZ paid or received interest under standard market

conditions;(b) relationships regarding the maintenance of a current account for which Sberbank CZ paid or received fees and

interest under standard market conditions;(c) credit transactions in trade finance, under which Sberbank CZ received a fee or interest under standard market

conditions;(d) Operations in the foreign exchange market under standard market conditions; and(e) relationships regarding the maintenance of nostro and loro accounts.

Sberbank CZ and Sberbank of Europe enter, on a continuous basis and under standard market conditions, into other relationships as follows:(a) relationships regarding interbank deposits, for which Sberbank CZ paid or received interest under standard market

conditions;(b) relationships regarding the maintenance of a current account for which Sberbank CZ paid or received fees and

interest under standard market conditions;(c) Credit transactions in corporate financing, under which Sberbank CZ received a fee or interest under standard

market conditions;(d) Operations in the foreign exchange market under standard market conditions; and(e) relationships regarding the maintenance of loro accounts.


144

Sberbank CZ, together with other controlled entities, enter, on a continuous basis and under standard market conditions, into other relationships as follows:(a) related to money market operations;(b) related to the foreign exchange market operations;(c) regarding the maintenance of loro and nostro accounts; and(d) regarding the maintenance of current accounts for which Sberbank CZ paid or received fees and interest under

standard market conditions.

Sberbank CZ cooperates in group projects within the group Sberbank Europe. Their overall objective is to fully utilise the business potential of Central European markets in all segments. The governing body concluded that the relationships are fully comparable with similar contractual relationships which Sberbank CZ enter in the field of inter-bank transactions.

7) Assessment of the potential damage to the controlled entity

In 2017, Sberbank CZ did not suffer any damage/loss as a result of relationships between related entities. All acts and contracts and agreements were made under standard market conditions.

8) The assessment of relationships between the controlling entity and the controlled entity and between the controlled entity and the entities controlled by the same controlling entity

Sberbank CZ operates on the Czech market as a universal and an independent bank in accordance with the applicable laws and regulations, providing financial services to its clients in accordance with its line of business and banking licence. In 2017, Sberbank CZ duly observed and complied with the legal and regulatory requirements.

Sberbank CZ confirms that in 2017 the controlling entity did not abuse the influence (whether directly or indirectly) of a controlling entity to force the adoption of any measure or to conclude any contract that could result in any damage to Sberbank CZ.

The relationships between Sberbank CZ and other related entities in 2017 corresponded to standard market conditions and the contracts and agreements concluded between them can be regarded as mutually beneficial. The mutual cooperation between the related entities within the group brings benefits for Sberbank CZ, including in the form of strengthening the position of Sberbank CZ in the market and expanding the range of financial services to its clients.

Sberbank CZ is not aware that the above-mentioned relationships within the Sberbank group create any disadvantages for the group.

9) Statement of the Management Board of Sberbank CZ

The Management Board of Sberbank CZ hereby declares that this report has been prepared in accordance with Section 82 et seq. of Act No. 90/2012 Coll. on business corporations. This report has been prepared with due care and to the best knowledge of the Management Board so as to fulfil the purpose of the Business Corporations Act and provide a credible Report on relationships between the related entities within the Sberbank Group.

In Prague on 26th March 2018

…………………………………………….. ……………………………………………..Jiří Antoš Dušan BaranMember of the Management Board Member of the Management BoardFor Sberbank CZ, a.s. For Sberbank CZ, a.s.


145SBERBANK CZ | ANNUAL REPORT 2017REPORT ON RELATIONSHIPS

146

100% 99.85% 98.43%100%99.28%

98.9268% 99.6399% 100% 100% 100% 100%99.9909%100%100%

100%

Sberbank of Russia

SberbankEurope AG

KazakhstanSubsidiary Bank Sberbank JSC

SwitzerlandSberbank AG

UkraineSberbank PJSC

TurkeyDenizBank A.S.

BelarusBPS-Sberbank OJSC

BranchOther companiesOther companiesOther companies Other companies Other companiesSberbank Direkt

(Sberbank Europe AG,Zweigniederlassung

Deutschland)

Hrvatski registar obvezapo kreditima drustvo

s organicenomodgovornoscu

za poslovne usluge(1.04%)

Sberbank d.d.Sberbank BH d.d.Sberbank Srbija a.d.Sberbank a.d. BLSberbankMagyarország Zrt.

Sberbank banka d.d.Sberbank CZ, a.s.

Garay CenterIngatlanforgalmazo es

Ingatlanhasznosito KorlatoltFelelossegu Tarsasag

BEVO-Holding GmbH

Sberbank a.d. BL(0.36%)

Superkartica d.o.o.(19.99%)


V-Dat InformatikaiSzolgaltato es Kereskedlmi Kft.

(100%)

Privatinvest d.o.o.(100%)

ALB EDV-Service GmbH(100%)

Registar vrijednosnihpapira u FBiH, d.d.

Sarajevo(0.69%)

East Site Ingatlanforgalmazo es Ingatlanhasznosito Korlatolt

Felelossegu Tarsasag(100%)

Pronam Nekretnine d.o.o.(100%)

Centralni registar HOV a.d.Banka Luka

(4%)

Egressy 2010 IngatalanforgalmazoKorlatolt Felelossegu Tarsasag

(100%)

Society of WorldwideInterbank Financial

Telecommunication SCRL(0.0055%)

Karyoli Ingatlan 2011 KorlatoltFelelossegu Tarsasag

(100%)

BANKART d.o.o.(0.3937%)

Fundamenta-LakaskasszaLakastakarekpenztar Zartkoruen

Mukodo Reszvenytarsasag(1.39%)

Society of WorldwideInterbank FinancialTelecommunication

SCRL(0.0018%)

Garantiqa Hitelgarancia ZartkoruenMukodo Reszvenytarsasag

(0.1276%)

Society of Worldwide InterbankFinancial Telecommunication SCRL (UK)

(0.0027%)

Visa Inc.(0.0148%)

Egressy Immo Kft VA(100%)

Sklad za reševanje bank(8.55%)

Structure of Relationships between Related EntitiesValid as of 31 December 2017

APPENDIX NO. 1 TO THE REPORT ON RELATIONSHIP


147

100% 99.85% 98.43%100%99.28%

98.9268% 99.6399% 100% 100% 100% 100%99.9909%100%100%

100%

Sberbank of Russia

SberbankEurope AG

KazakhstanSubsidiary Bank Sberbank JSC

SwitzerlandSberbank AG

UkraineSberbank PJSC

TurkeyDenizBank A.S.

BelarusBPS-Sberbank OJSC

BranchOther companiesOther companiesOther companies Other companies Other companiesSberbank Direkt

(Sberbank Europe AG,Zweigniederlassung

Deutschland)

Hrvatski registar obvezapo kreditima drustvo

s organicenomodgovornoscu

za poslovne usluge(1.04%)

Sberbank d.d.Sberbank BH d.d.Sberbank Srbija a.d.Sberbank a.d. BLSberbankMagyarország Zrt.

Sberbank banka d.d.Sberbank CZ, a.s.

Garay CenterIngatlanforgalmazo es

Ingatlanhasznosito KorlatoltFelelossegu Tarsasag

BEVO-Holding GmbH

Sberbank a.d. BL(0.36%)



V-Dat InformatikaiSzolgaltato es Kereskedlmi Kft.

(100%)

Privatinvest d.o.o.(100%)

ALB EDV-Service GmbH(100%)

Registar vrijednosnihpapira u FBiH, d.d.

Sarajevo(0.69%)

East Site Ingatlanforgalmazo es Ingatlanhasznosito Korlatolt

Felelossegu Tarsasag(100%)

Pronam Nekretnine d.o.o.(100%)

Centralni registar HOV a.d.Banka Luka

(4%)

Egressy 2010 IngatalanforgalmazoKorlatolt Felelossegu Tarsasag

(100%)

Society of WorldwideInterbank Financial

Telecommunication SCRL(0.0055%)

Karyoli Ingatlan 2011 KorlatoltFelelossegu Tarsasag

(100%)

BANKART d.o.o.(0.3937%)

Fundamenta-LakaskasszaLakastakarekpenztar Zartkoruen

Mukodo Reszvenytarsasag(1.39%)

Society of WorldwideInterbank FinancialTelecommunication

SCRL(0.0018%)

Garantiqa Hitelgarancia ZartkoruenMukodo Reszvenytarsasag

(0.1276%)

Society of Worldwide InterbankFinancial Telecommunication SCRL (UK)

(0.0027%)

Visa Inc.(0.0148%)

Egressy Immo Kft VA(100%)

Sklad za reševanje bank(8.55%)


SBERBANK CZ | ANNUAL REPORT 2017AFFIDAVIT 148

22. AFFIDAVIT

We, the undersigned, hereby declare that the annual report of Sberbank CZ, a.s., for the year 2017 provides, to the best of our knowledge, a true and accurate picture of the financial position, business activities and profit and loss of Sberbank CZ, a.s., for the previous fiscal period and of the outlook of the future financial situation, business activities and profit and loss.

In Prague on 5 April 2018

On behalf of Sberbank CZ, a.s.

…………………………………………….. ……………………………………………..Jiří Antoš Dušan BaranMember of the Management Board Member of the Management BoardFor Sberbank CZ, a.s. For Sberbank CZ, a.s.

SBERBANK CZ | ANNUAL REPORT 2017INDEPENDENT AUDITOR’S REPORT 149

INDEPENDENT AUDITOR’S REPORT

To the Shareholder of Sberbank CZ, a.s.:

Report on the Audit of the Financial Statements

Opinion

We have audited the accompanying financial statements of Sberbank CZ, a.s. (hereinafter also the “Bank”) prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS EU”), which comprise the statement of financial position as at 31 December 2017, and the statement of comprehensive income, statement of changes in equity and statement of cash flow for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information. For details of the Bank, see Note 1 to the financial statements.

In our opinion, the accompanying financial statements give a true and fair view of the financial position of Sberbank CZ, a.s. as at 31 December 2017, and of its financial performance and its cash flows for the year then ended in accordance with IFRS EU.

Basis for Opinion

We conducted our audit in accordance with the Act on Auditors, Regulation (EU) No. 537/2014 of the European Parliament and the Council, and Auditing Standards of the Chamber of Auditors of the Czech Republic, which are International Standards on Auditing (ISAs), as amended by the related application clauses. Our responsibilities under this law and regulation are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the Act on Auditors and the Code of Ethics adopted by the Chamber of Auditors of the Czech Republic and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor‘s responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

23. INDEPENDENT AUDITOR’S REPORT

150

Credit risk and impairment of loans and advances to customers

The appropriateness of loan impairment allowances is a key area of judgement for the Bank’s management. The identification of impairment and the determination of the recoverable amount are an inherently uncertain process involving various assumptions. There is also uncertainty related to the development of the local economy and the Eurozone, including the geo-political effects such as tensions with Russia, and their impact on the overall level of defaults in the Czech market.

Due to the signif icance of Loans and advances to customers, representing 74% of total assets, this is considered to be a key audit matter.

The Bank performs an individual assessment of loan impairment allowances for individually signif icant exposures. This requires significant judgment of the management regarding the identif ication of the impairment trigger and cash flow forecasts, including collateral realization, which involves a high level of complexity due to the changing credit environment.

Further, statistical models are used for the estimation of loan impairment allowances for individually not-significant exposures and portfolios where a default was not identif ied on an individual basis. However, the changing credit environment could have a negative impact on the stability and sustainability of the models used and on the accuracy of loan impairment allowances calculated using these models.

Moreover, International Financial Reporting Standard 9, Financial instruments (“IFRS 9” or the “Standard”) becomes effective for annual periods beginning on or after 1 January 2018. As such, the Bank is required to disclose the expected impact of IFRS 9 in the notes to the financial statements as at 31 December 2017. Given the complexity of the requirements of the Standard and the significance of the impact on the level of impairment of loans and advances to customers we paid a particular attention to the related disclosures.

We tested the controls implemented in the credit allowance process and assessed their operating ef fec t iveness . We per formed analy t ical rev iew procedures related to the development of the structure and characteristics of the credit portfolio, including the related credit impairment allowances and provisions.

Specif ic procedures addressing the credit risk for individually significant exposures included a review of a sample of loan exposures, and an assessment of each exposure’s classif ication and the adequacy of the individual impairment allowance, where relevant. We also selected a sample of collateral and inspected the existence and the value of the collateral, for which valuation specialists were involved. The work performed was focused on the exposures with the most risk considering both the quantitative and qualitative factors such as the ownership structure, industry or financial performance.

In respect of credit allowance models, we involved risk specialists, inspected the model documentation and other related evidence such as back-testing and assessed their compliance with IFRS EU. We also addressed significant changes implemented in the current period. We verified the application of the models through the recalculation of allowances either on the individual or portfolio level.

We also assessed whether the f inancial statement disclosures appropriately reflect the Bank’s exposure to the credit risk and are compliant with IFRS EU.

We also assessed the adequacy of the Bank’s disclosures related to assessment of the impact of the new standard IFRS 9 Financial instruments.

Refer to the Section 33b Credit risk for the relevant disclosures and to the Section 2(aa) IFRS /IAS accounting and reporting developments for the relevant disclosures regarding IFRS 9.

SBERBANK CZ | ANNUAL REPORT 2017INDEPENDENT AUDITOR’S REPORT

151

Regulatory matters and inspection

On an ongoing basis, the Bank faces challenges and risks related to the changing regulatory environment, including the increased level of regulatory scrutiny and pressure on compliance with newly enforced legislation. A proper response from the Bank to these challenges, including disclosure in the financial statements (if required), is important from a going concern perspective as well as the fairness of the financial statements presentation. Moreover, the last of the lending restrictions resulting from the Czech National Bank (‘CNB’) inspection (as described in the Section 33b of the notes to the financial statements) remained in place until February 2017. Therefore we consider this area to be a key audit matter for the reporting period.

We continuously monitored the impact of current and new regulations on the financial statements and note disclosures. This included, but was not limited to, inquiries of Management and Audit Committee and inspection of Compliance department and Internal Audit reports. We also assessed the completeness and adequacy of disclosures related to regulatory matters.

With respect to the CNB inspection, we monitored and discussed the development of remedial action steps with the Management. We inspected the communication (both incoming and outgoing) with the regulator. We assessed the impact of the inspection on the audit and our conclusions, mainly in relation to the control environment.

We analyzed the structure of statement of financial position and monitored the development of loan and deposit balances. We reviewed the liquidity reports and assessed the development of the liquidity position of the Bank.

Refer to the Section 33b Credit risk for the relevant disclosures.

Other Information

In compliance with Section 2(b) of the Act on Auditors, the other information comprises the information included in the Annual Report other than the financial statements and auditor’s report thereon. The Board of Directors is responsible for the other information.

Our opinion on the financial statements does not cover the other information. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. In addition, we assess whether the other information has been prepared, in all material respects, in accordance with applicable law or regulation, in particular, whether the other information complies with law or regulation in terms of formal requirements and procedure for preparing the other information in the context of materiality, i.e. whether any non-compliance with these requirements could influence judgments made on the basis of the other information.

Based on the procedures performed, to the extent we are able to assess it, we report that:

• The other information describing the facts that are also presented in the financial statements is, in all material respects, consistent with the financial statements; and

• The other information is prepared in compliance with applicable law or regulation.

In addition, our responsibility is to report, based on the knowledge and understanding of the Bank obtained in the audit, on whether the other information contains any material misstatement. Based on the procedures we have performed on the other information obtained, we have not identified any material misstatement.


152

Responsibilities of the Bank’s Board of Directors and Audit Committee for the Financial Statements

The Board of Directors is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS EU and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

The Audit Committee is responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with above regulations will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with the above law or regulation, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.

• Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.


153

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

In compliance with Article 10(2) of Regulation (EU) No. 537/2014 of the European Parliament and the Council, we provide the following information in our independent auditor’s report, which is required in addition to the requirements of ISAs:

Appointment of Auditor and Period of Engagement

We were appointed as the auditors of the Bank by the General Meeting on 26 April 2017 and our uninterrupted engagement has lasted for 6 years.

Consistence with Additional Report to Audit Committee

We confirm that our audit opinion on the financial statements expressed herein is consistent with the additional report to the Audit Committee of the Bank, which we issued on 31 March 2018 in accordance with Article 11 of Regulation (EU) No. 537/2014 of the European Parliament and the Council.

Provision of Non-audit Services

We declare that no prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No. 537/2014 of the European Parliament and the Council were provided by us to the Bank. In addition, there are no other non-audit services which were provided by us to the Bank and which have not been disclosed in the financial statements.

Ernst & Young Audit, s.r.o.License No. 401

Lenka Bízová, Auditor Douglas BurnhamLicense No. 2331 Partner

5 April 2018Prague, Czech Republic


SBERBANK CZ | ANNUAL REPORT 2017OUR NETWORK154

24. OUR NETWORK

Head officePRAHAU Trezorky 921/2158 00 Praha 5 Tel.: +420 800 133 444

Corporate centresBRNOM-Palác, Heršpická 5639 00 BrnoTel.: +420 543 525 156

ČESKÉ BUDĚJOVICEnám. Přemysla Otakara II. č. 27370 01 České BudějoviceTel.: +420 386 105 822

HRADEC KRÁLOVÉGočárova třída 718/13500 02 Hradec KrálovéTel.: +420 495 000 362

JIHLAVABenešova 15586 01 JihlavaTel.: +420 567 584 526

LIBERECSoukenné náměstí 26460 07 LiberecTel.: +420 482 428 357

OLOMOUCKřížkovského 5779 00 OlomoucTel.: +420 585 208 318

OSTRAVA28. října 3138/41702 00 OstravaTel.: +420 595 133 415

PLZEŇAmerická 1981/24301 00 PlzeňTel.: +420 377 350 214

PRAHA 5U Trezorky 921/2158 00 Praha 5 Tel.: +420 221 584 042

ÚSTÍ NAD LABEMMírové náměstí 3428/5A400 01 Ústí nad LabemTel.: +420 475 667 009

ZLÍNŠtefánikova 5293760 01 ZlínTel.: +420 577 002 119

BranchesBRNOM-Palác, Heršpická 5639 00 BrnoTel.: +420 543 525 410

BRNOPalackého 38612 00 BrnoTel.: +420 549 122 622

BRNOPanská 2/4602 00 BrnoTel.: +420 542 424 970

BRNOGalerie Vaňkovka, Ve Vaňkovce 1602 00 BrnoTel.: +420 543 552 214

ČESKÉ BUDĚJOVICEnám. Přemysla Otakara II. č. 27370 01 České BudějoviceTel.: +420 386 105 810

FRÝDEK-MÍSTEKOC Frýda, Na Příkopě 3727738 01 Frýdek-MístekTel.: +420 558 604 611

HRADEC KRÁLOVÉGočárova třída 718/13500 02 Hradec KrálovéTel.: +420 495 000 358

JIHLAVABenešova 15586 01 JihlavaTel.: +420 567 584 511

KARLOVY VARYT. G. Masaryka 854/25360 01 Karlovy VaryTel.: +420 353 244 713

LIBERECSoukenné náměstí 26460 07 LiberecTel.: +420 482 428 354

OLOMOUCHorní náměstí 17779 00 OlomoucTel.: +420 585 202 711

OSTRAVA28. října 3138/41702 00 OstravaTel.: +420 595 133 411

PARDUBICE17. listopadu 408530 02 PardubiceTel.: +420 466 067 712

PLZEŇAmerická 1981/24301 00 PlzeňTel.: +420 377 350 211

PRAHA 1Na Příkopě 860/24110 00 Praha 1Tel.: +420 267 267 911

PRAHA 1Václavské nám. 804/58 110 00 Praha 1Tel.: +420 221 102 301

PRAHA 2Lazarská 8120 00 Praha 2Tel.: +420 221 584 285

PRAHA 2Náměstí I. P. Pavlova 3120 00 Praha 2Tel.: +420 221 102 411

PRAHA 2Vinohradská 40120 00 Praha 2Tel.: +420 222 922 828

PRAHA 4Na Pankráci 1724/129140 00 Praha 4Tel.: +420 234 706 933

PRAHA 5Karla Engliše 1 (Anděl)150 00 Praha 5Tel.: +420 257 257 301

PRAHA 7Strossmayerovo náměstí 967/12170 00 Praha 7Tel.: +420 220 410 620

PRAHA 9Centrum Černý Most, Chlumecká 765/6198 00 Praha 9Tel.: +420 221 101 313

TÁBOR Nám. Františka Křižíka 506390 01 TáborTel.: +420 381 204 411

TEPLICEOC Galerie, Náměstí Svobody 3316415 01 TepliceTel.: +420 417 543 911

ÚSTÍ NAD LABEM Mírové náměstí 3428/5A 400 01 Ústí nad Labem Tel.: +420 475 667 004

ZLÍNŠtefánikova 5293760 01 ZlínTel.: +420 577 002 111

ZNOJMOJana Palacha 1262/11669 02 ZnojmoTel.: +420 515 282 511

SBERBANK CZ | ANNUAL REPORT 2017OUR NETWORK

KARLOVY VARYT. G. Masaryka 854/25360 01 Karlovy Vary0–24 hodin

KARLOVY VARYVřídelní 83/11360 01 Karlovy Vary8–22 hodin

LIBERECSoukenné náměstí 26460 01 Liberec0–24 hodin

OLOMOUCHorní náměstí 14/17779 00 Olomouc0–24 hodin

OSTRAVA28. října 3138/41702 00 Ostrava0–24 hodin

PARDUBICE17. listopadu 408530 02 Pardubice0–24 hodin

PLZEŇAmerická 1981/24301 00 Plzeň0–24 hodin

PRAHA 1Na Příkopě 860/24110 00 Praha 10–24 hodin

PRAHA 1Václavské nám. 804/58 I.110 00 Praha 10–24 hodin

PRAHA 1Václavské nám. 804/58 II.110 00 Praha 19–19 hodin

PRAHA 2Lazarská 8/13120 00 Praha 20–24 hodin

PRAHA 2Náměstí I. P. Pavlova 3120 00 Praha 20–24 hodin

PRAHA 2Vinohradská 1789/40120 00 Praha 20–24 hodin

PRAHA 4Na Pankráci 1724/129140 00 Praha 40–24 hodin

PRAHA 5Karla Engliše 1 (Anděl)150 00 Praha 50–24 hodin

PRAHA 5U Trezorky 921/2158 00 Praha 5 0–24 hodin

PRAHA 7Strossmayerovo náměstí 967/12170 00 Praha 70–24 hodin

PRAHA 9Centrum Černý Most, Chlumecká 765/6198 00 Praha 90–24 hodin

TÁBOR Nám. Františka Křižíka 506390 01 Tábor0–24 hodin

TEPLICEOC Galerie, Náměstí Svobody 3316415 01 Teplice0–24 hodin

ÚSTÍ NAD LABEM Mírové náměstí 3428/5A 400 01 Ústí nad Labem 0–24 hodin

ZLÍNŠtefánikova 5293760 01 Zlín0–24 hodin

ZNOJMOJana Palacha 1262/11669 02 Znojmo0–24 hodin

ATMBRNOPanská 2/4602 00 Brno0–24 hodin

BRNOM-Palác, Heršpická 5639 00 Brno0–24 hodin

BRNOPalackého třída 183/38612 00 Brno0–24 hodin

BRNOGalerie Vaňkovka, Ve Vaňkovce 1602 00 Brno7–22 hodin

ČESKÉ BUDĚJOVICEnám. Přemysla Otakara II. č. 89/27370 01 České Budějovice0–24 hodin

FRÝDEK-MÍSTEKOC Frýda, Na Příkopě 3727738 01 Frýdek-MístekPo–So: 7–20 hodinNe: 8–20 hodin

HRADEC KRÁLOVÉGočárova třída 718/13500 02 Hradec Králové0–24 hodin

JIHLAVABenešova 15586 01 Jihlava0–24 hodin

Praha

Plzeň

České BudějoviceJihlava

Liberec

Hradec Králové

Karlovy Vary

Olomouc

Ostrava

ZlínBrno

Znojmo

Pardubice

Frýdek-Místek

Teplice

Ústí nadLabem

Tábor

The annual report is published on the Sberbank CZ website (section Annual Reports and Financial Results) at: http://www.sberbankcz.cz/en/annual-reports-and-financial-results/

© 2018 Sberbank CZ, a.s.

Sberbank CZ, a.s.U Trezorky 921/2158 00 Praha 5, Česká republikaTel.: +420 221 969 911, Fax: +420 221 969 [email protected], www.sberbank.cz

Sberbank Europe AGSchwarzenbergplatz 31010 Vienna, AustriaTel.: +43 1 [email protected], www.sberbank.at